The effect of monetary policy on commercial banks lending rates Kenya

Abstract

One of the most prevalent and common condemnation directed at the Central Bank of Kenya has been its inept to force commercial banks to reduce their lending rates. The biggest challenge Kenya is facing is the persistent increase in lending rate where the cost of borrowing has been rising incessantly. This has a negative effect on investment because the higher cost of borrowing discourages investors from borrowing capital, it also has a negative effect on commercial banks profitability and propagate rise in non-performing loans. The research objective was to assess the impact of monetary policy on commercial banks lending rates in Kenya. The study adopted a quantitative design. The population of interest in the study consisted of 44 banking institutions (43 commercial banks and 1 mortgage finance company). The study was based wholly on secondary data obtained from Central Bank of Kenya. The researcher conducted a multiple regression analysis in order to study the relationship between monetary policies and lending rate in Kenya. The research findings established that there is a strong positive relationship between CBR rate and bank`s lending rates. The study concludes that the Central Bank rate is the main influencer of lending rates in the study period followed by the 91 Day Treasury bill and the Repo rate. However, the Cash Reserve Requirement has a negative relationship with the prevailing lending rates. The study recommends that the Central Bank of Kenya should lower the Central Bank Rate since it would lead to a decrement in the lending rates. Before making any adjustments in the current monetary rates, the concerned authorities in this case the Central Bank should adequately assess the influence of their monetary tools on current money supply in the economy.