Effect of Monetary Policy on Credit Supply in Kenya

Frida Njiru, Duncan Elly


Purpose- This paper sought to establish the effect of monetary policy on credit supply in Kenya. Methodology- This study adopted a descriptive research design. Descriptive statistics such asmean, median, minimum, maximum and standard deviation were used to describe the trend ofthe variables. Breusch Godfrey serial correlation LM test was used to test correlation of the studyvariables. Stationarity tests on time series data was conducted using augmented dickey fuller teststatistic. Regression analysis was used to establish the influence of monetary policy on creditsupply. Findings- The study concluded that CRR, OMO and Inflation are significant and have a negativeeffect on credit supply. The model was also fit to explain the relationship as 76% (R= 0.761160)variation of the dependent variable (Credit supply) was explained by the independent variables(OMO, CRR, CBR and Inflation) in the long run. Adjusted R- square which provides adjustmentto the R Square was73% (Adjusted R2= 0.736664) indicating 73% variation in credit supply wasexplained by independent variables (OMO, CRR, CBR and Inflation). F- Statistic 31.07233 wassignificant at 1% level P=0.0000. Implications – The study recommends that the Central Bank of Kenya should come up withmonitoring and evaluation programmes of monitoring how credit supply is influenced by variousmonetary policy instruments and should streamline the economic environment in which banksoperate by ensuring CRR, OMO and Inflation are maintained at a constant. Value –The study narrowed in scope to commercial banks and excluded the non-bankingorganizations. Additionally a study should be done on the impact of monetary policy on moneysupply to capture both banking and non-banking institutions. The research had a presumptionthat the relationship of the variables was linear therefore more studies should be carried outexplore nonlinear relationship on the variables of study, 2

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