Effect of monetary policy interventions on financial performance of commercial banks in Kenya and the moderating role of bank size

Abstract

This study examines the impact of monetary policy interventions on the financial performance of Kenyan commercial banks, with a specific focus on how bank size moderates these effects. It is based on three key economic theories—Monetarist Policy Theory, Classical Theory of Interest Rates, and Financial Repression Theory, providing a framework to analyze the relationship between monetary policy and bank performance. Using panel data analysis within a descriptive research approach, the study assesses financial performance trends from 2014 to 2023 using secondary data. ROA was used to measure financial performance of the Kenyan commercial banks. Findings reveal that: Interest rates, reserve requirements, and open market operations significantly influence financial performance, higher CBRs negatively impact bank profitability, while open market operations positively affect ROA, reserve requirements increase ROA, but the effect weakens with larger banks and bank size moderates these relationships, with larger banks benefiting more from monetary policy interventions. The study recommends bank management to monitor interest rates and adjust strategies, focusing on fixed-rate loans and revenue diversification. Policymakers should balance interest rate changes to maintain economic stability while safeguarding bank profitability. Future research should explore the long-term implications of monetary policy adjustments, the role of bank size, and cross-national comparisons for broader insights. Bank size significantly moderates the relationships among risk, financial performance, and other key banking factors, influencing how these variables interact. However, unlike previous studies, this research found that neither the central bank rate nor the cash reserve ratio affects bank size's moderating role, highlighting gaps that requires further investigation. Key words: Monetarist Policy Theory, Classical Theory of Interest, Financial Repression Theory, Return on Assets.