Impact of monetary policy rates on commercial bank lending rates: Kenya bankers reference rate

Abstract

The purpose of this study was to find out the impact of monetary policy on commercial bank lending rate with a view of implementation of the Kenya Bankers' Reference Rate (KBRR). The key components of the KBRR; The 91 day T-Bill rate and the Central Bank Rate were the main focus of this study along with the inter-bank lending rate. This paper used an Autoregressive Distributed Lag (ARDL) Model to estimate the short run and long run impact of the 91 day Tbill Rate, Central Bank Rate and Inter-bank Lending Rate on the average commercial bank lending rate. Time series data from the Central Bank of Kenya was used for the period July 1991-May 2015. The study finds a significant positive relationship between the forenamed monetary policy rates and the commercial bank lending rate. The conclusion of this study is that the 91 day T-bill rate, inter-bank lending rate and Central Bank rate all have a positive impact on the commercial bank lending rate. The Central Bank Rate however, a key component of the KBRR, has the greatest and most immediate effect on the lending rate. This study recommends that more weight be allocated to the CBR rate than the 91 day T-bill rate in calculating the KBRR as well as a more regular review of the KBRR than the bi-annual one currently in place.