Impact of financial innovation on the effectiveness of the bank-lending channel of monetary policy transmission in Kenya

Abstract

The bank lending channel of monetary policy transmission simply links the monetary policy decisions to the real economy through its direct effect on the bank loan supply. However the presence and effectiveness of channel has been quite controversial among economic researchers especially with the evolution of financial innovation. Previous studies have indicated that financial innovation tends to affect the existing channels monetary policy transmission however with few focusing on the specific channels particularly in Kenya where financial innovation is evolving at a fast pace. Therefore this project intends on filling this gap by adding financial innovation to the existing variables that affect total loan supply given changes in the monetary policy. The study will also intend on using the 91-day Treasury bill rate as a proxy measure to the short term interest rates controlled by Central Bank of Kenya.