Relationship between growth in bank lending and inflation in Kenya 2000-2010

Abstract

This paper seeks to investigate the relationship between the growth of bank lending and inflation rate in Kenya for the period 2000- 2010. The investigation primarily relies on Central bank data for this period. The research is founded on neo-monetarist theory of money supply. The neo monetarist while accepting the fact that money supply is exogeously determined , also acknowledge that commercial banks create moneythrough the lending process . For the purpose of this research, month on month growth in lending book of all commercial banks in Kenya between 2000 and 2010,the lending rate and M3 were the independent variables while inflation rate was the dependent variable. The data was analysed through the OLS . Three of the four data series were found to be integrated of order 0 and only the dependent variable was found to be integrated of order 1, there was no need to test for co-integration of the series. The research finds that a positive relationship between inflation rate and money supply exists in Kenya for the period . Further, we established that a positive relationship between inflation rate and increase in bank lending.However, the study reveals that the relationship between increase in inflation and growth in bank lending in Kenya for the period under review is not significant.