MONETARY POLICY AND PERFORMANCE OF SELECTED COMMERCIAL BANKS IN KENYA.

The purpose of this study was to investigate the monetary policy and performance of commercial banks in Kenya. Commercial Banks have on average been posting a continuous decline in their performance over the last decade. The study was guided by the following objectives; to establish the effect of interest rate and performance of commercial banks, to establish the effect of cash reserve ratio and performance of commercial banks, to establish the effect of open market operation and performance of commercial banks and to establish the effect of discount window operation and performance of commercial banks in Kenya. The study targeted all commercial banks in Kenya from which simple random sampling was used to obtain a sample. Sampling frame being the central bank’s list of licensed commercial banks in Kenya before the year 2011. This study used both primary and secondary data. Primary data were obtained by administering questionnaire on a drop and pick basis while secondary data were obtained from central bank of Kenya annual reports and specific commercial banks audited financial statements. Data collected were analysed using multiple regression model and data presentation using graphs and tables to establish the relationship between monetary policy and performance of commercial banks. Correlation research design was also adopted to explain the existing relationship between monetary policy and performance of commercial banks in Kenya. The study found out that monetary policy controls 72.2% of performance of commercial banks in Kenya. Taking all other independent variables at zero the performance of commercial banks was 10.365, a unit increase in central bank rate will lead to a 0.025 increase in performance commercial bank; a unit increase in cash reserve ratio will lead to a 1.053 times decrease in performance of commercial bank, a unit increase in open market operation led to a 0.057 increase the performance of commercial in banks and a unit increase in discount window operation will lead to 0.61 decrease in the performance of commercial banks. This concluded cash reserve ratio has the greatest effect on the performance of commercial banks followed by open market operation. At 5% level of significance and 95% level of confidence, all the independent variables were significant in determining performance of commercial banks in Kenya. The study recommended that central bank of Kenya should consider raising the central banks rate since it was found to be the only variable from monetary policy that is improving commercial banks profitability. Cash reserve ratio has been negating the performance of commercial banks in Kenya, central bank of Kenya should select a low and suitable rate the commercial banks are required to maintain in the cash tills.