The interest rate pass-through from the Central Bank Rate to Microfinance Banks' lending rates in Kenya

Abstract

This paper investigates the significance of the interest rate pass-through from monetary policy rates to microfinance lending rates in Kenya. This methodology makes use of the Vector Auto regression Model, using annual data from a sample of 6 micro finance institutions from the year 2000 to 2015. This study finds that the degree of interest rate pass-through is insignificant and that it takes a considerable period of time before the policy rates can be fully reflected in the long term microfinance lending rates. The Impulse response and Variance Decomposition models also indicate that the relationship between the Central Bank Rate and the Microfinance Bank lending rates was insignificant. This study is novel as it is one of the first attempts to consider the effectiveness of monetary policy in the Kenyan microfinance sector, hence providing policy makers with additional insights to the effectiveness of monetary policy in the microfinance sector.