Does Bank Lending Channel Exist in Kenya: Bank Level Panel Data Analysis

Moses Muse Sichei and Githinji Njenga

Working Papers from African Economic Research Consortium

Abstract: The study empirically investigates bank lending channel (BLC) of monetary policy transmission in Kenya using annual bank-level panel data during the period 2001-2008. A modified IS/LM model with bank lending is used in the spirit of Bernanke and Blinder (1988), and banks are segregated on the basis of asset size, capital adequacy, liquidity and foreign ownership criteria. The main finding is that BLC exists in Kenya based on bank liquidity and capitalization. In particular, banks with less liquid balance sheets and low total capital to risk-weighted asset ratios are hit most by monetary policy. Since low liquidity and low capital banks are generally large banks, which contribute 82% of total bank credit, BLC is significant in Kenya. The existence of BLC means that monetary policy has asymmetric effects on banks and borrowers in Kenya. Further, bank credit can be used as a nominal anchor for monetary policy and a leading indicator for economic activity in Kenya.

Date: 2012-08
Note: African Economic Research Consortium
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