CENTRAL BANK OF KENYA MONETARY POLICY AND PROFITABILITY OF COMMERCIAL BANKS IN KENYA
CENTRAL BANK OF KENYA MONETARY POLICY AND PROFITABILITY OF COMMERCIAL BANKS IN KENYA
Laura Lamba Makokha - Master of Business Administration Student, Department of Accounting and Finance School of Business, Economics and Tourism, Kenyatta University, Kenya
Dr. Moses Odhiambo Aluoch (PhD) - Lecturer, Department of Accounting and Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya
ABSTRACT
The banking institutions in Kenya are crucial for the country's economic growth. Nevertheless, numerous banks in Kenya have encountered difficulties lately that have affected their operations. These reports show a rising occurrence of loans that are not being repaid and A decline in Return on Assets, dipping below the banking sector standard of approximately 1%. Therefore, the primary emphasis of the present investigation was to explore the impact of central bank of Kenya monetary policy on the profitability of commercial banks in Kenya, with inflation serving as the moderating variable. The research specifically evaluated cash reserve ratio, central bank rate, and open market operations and how they had affected the banks’ profitability. Theories adopted encompassed; financial intermediation theory, Keynesian theory, and the structural theory of inflation. An explanatory type study design was applied. Analysis of 39 commercial operating within Kenya was done applying census. The secondary source of data from 2020 to 2025 was gathered using secondary data collecting form. A trend and times series analyses were used in determining profitability at a certain point in time for the specified timeframe. The process of data analyses involved descriptive statistics and inferential statistics especially the correlation and time series regression methods. The diagnostic tests applied included the; multicollinearity assessment, and a heteroscedasticity evaluation. The findings were displayed in tables. The limitations of the study could include; potential misalignment of secondary data and the precision and comprehensiveness of secondary data could differ, particularly when gathered by various institutions. The ethical standards were upholding integrity and honesty by ensuring transparency throughout the research process. The research observed that cash reserve ratio (r=0.791; p=0.004), Central bank rate (r=0.801; p=0.002) and open market operations (r=0.707; p=0.005) had a positive significant effect on profitability of commercial banks in Kenya. Moreover, inflation was found to have contributed to positive significant moderation between Central Bank of Kenya monetary policy and profitability of commercial banks in Kenya. The conclusion made were that the lower the Central Bank of Kenya cash reserve ratio, the higher the banking lending rate resulting to increased profitability from higher interest income earned. A change in Central Bank of Kenya nterest rate affects the cost of borrowing and returns on commercial banks deposits. The purchase of securities by the Central Bank of Kenya puts more liquidity within the banking system increasing the lending rate of commercial banks thus stimulating borrowing power. The rise in inflation makes the Central Bank of Kenya to increase interest rate so as to make the economy of the country stable which raises the cost of borrowing. The recommendations made were that the commercial banks could look for more alternative source of earning revenue like investment banking, management of assets and advisory service fees. Commercial banks should raise the interest rate on loans when Central bank rates are increased. Commercial banks should effectively manage the asset liability through closer tracking of asset and liability maturity profiles for optimum interest income while handling risks associated with liquidity and interest rates. The commercial banks should adjust their interest rates on loans and deposits for protection of their profit margins.
