Relationship between Monetary Policies and Financial Performance of Banking Institutions in Kenya: A Case Study of Commercial Banks in Nairobi City

Abstract

The main purpose of this study was to determine if central bank rate relate with financial performance, to establish whether central bank open market operations associate with financial performance, to evaluate relationship between cash reserve ratio and financial performance and finally to determine the moderating influence of banks size on the relationship between monetary policies and financial performance. A case study of commercial banks in Nairobi city had a sample size of 42 commercial banks. The study adopted descriptive research design. Data was collected using secondary data collection sheet. The collected data was analyzed through quantitative methods of descriptive and inferential statistics such as correlation and multiple regression models. The tool used was Statistical Package for Social Sciences version 20.0. The findings established were represented in form of Tables and Figures. The study established that central bank rate has a positive and significant influence on financial performance of commercial banks in Kenya; central bank open market operations also has a positive and significant influence on financial performance of commercial banks in Kenya; cash reserve ratio has a negative and insignificant influence on financial performance of commercial banks in Kenya and bank size as a moderating variable has positive significant moderating effect on the relationship between monetary policies and financial performance of commercial banks in Kenya. The study recommends commercial banks to put more emphasis on both internal and external factors; the study recommends that the financial regulatory authorities such as the central bank of Kenya should formulate policies that can foster commercial banks involvement in investing in treasury bills and treasury bonds; the central bank of Kenya should be flexible when changing the cash reserve ratio and finally the banks management should embark on activities that will lead to high assets volume such as lowering of interest rate to attract borrowers and better customer relationship to retain customers.