ANALYSIS OF MONETARY POLICY, CREDIT MARKET AND LENDING RATES AMONG COMMERCIAL BANKS IN KENYA
Journal Title: Africa International Journal of Management Education and Governance - Year 2016, Vol 1, Issue 1
Abstract
With banks being the major avenue that the CBK relies on to execute monetary policy, the paper sought to investigate whether commercial banks are actually responsive to monetary policy. The study used an Error Correctional Model to estimate a relationship where lending rates were treated as the dependent variable while the independent variables were monetary policy, specifically CBR. The model was also expanded to include additional independent variables specifically monetary policy transmission channels. These include the credit channel which is represented by credit to the private sector, exchange rate channel represented as nominal exchange rate and asset price channel. For consistency, inflation and economic growth were included in the model because these are the targets of monetary policy. The study findings showed that there was a long run relationship between lending rates and Central Bank Rate, Exchange Rates, Asset Price, Credit to the Private Sector, Economic growth and Inflation Rates. The results also indicated that CBR and Inflation cause lending rates to increase in the short run while credit to the private sector causes lending rates to decrease in the short run. A statistically significant relationship was also established between lending rates and CBR, credit to the private sector. The study concludes that commercial banks’ lending rates are indeed positively responsive to CBR and that in order to spur economic growth; commercial banks’ lending rates should be stabilized by streamlining the economic environment in which commercial banks operate, therefore ensuring stable rates of borrowing.
Authors and Affiliations
Peter Omae Kabuka, Joseph Abuga Orayo, Kennedy Mwengei B. Ombaba
Keywords
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