The Role of Central Bank rate on Commercial Banks profitability in Kenya

Abstract

The main purpose of the research is to investigate the role of central bank rate on commercial banks profitability in Kenya. Recent movements in interest rates, inflation and exchange rates present real dangers to economic stability. The economy has endured steep inflationary pressures and exchange depreciation for about 9 months in 2011. This was a descriptive study where the researcher gathered data from the published accounts and financial statements from the nine listed commercial banks in Kenya. The study found that taking all factors (central bank rate) constant at zero, commercial banks profitability in Kenya will be 1.147. Similarly, taking all other independent variables at zero, a unit increase in central bank rate will lead to a 0.752 increase in commercial banks profitability in Kenya. The study concluded that there has been a drastic change in CBK rates for the period between years 2007 to 2012. The increase in CBK rates has doubled over the reported period between 2007 and 2012. Although there were both upward and downward trends of CBK rate the overall effect was an increase in the CBK rates. The study recommends that the management of commercial banks in Kenya should invent strategies that cushion the banks from drastic changes in central bank rate which hamper their attractiveness to its customers. The study also recommends that the banks management should invest in economic research to predict the changes in the economy so as to be well prepared for the changing trends in the market that negatively impact on the banks profitability. This study encountered the following limitations; the limitation of time and financial constraint, which made has concentrate on a very narrow aspect of interest rates. In addition we could not carry an in-depth analysis of the data collected