The purpose of this study was to establish the effect of monetary policy on financial performance of commercial banks in Kenya. This study adopted a descriptive survey of commercial banks in Kenya. The main reason for selecting descriptive research design was because it provides a knowledge base when little is known about a phenomenon or such things as clarification of a situation, classification of information, or description of subject characteristics that will aid in the refinement of the research problem, formulation of the hypothesis, or design of data collection and analysis procedures. Secondary data was collected from financial reports of commercial banks in Kenya from 2008 to 2012 Regression analysis was conducted in order to establish the effect of monetary policy on financial performance of commercial banks in Kenya Monetary policy was measured using three variables which were the independent variables of the study. These variables included the deposits made by the commercial banks to the Central Bank of Kenya, the base interest rate that is usually provided by the Central Bank of Kenya and the amount of money the commercial banks have invested in government securities. The dependent variable of the study was the profitability of the commercial banks in Kenya and this was measured using the return on assets as a percentage. The findings from the study confirmed that monetary policy explained 54% of the variance in the profitability of the commercial banks in Kenya. This was a clear indication the variance that remained unexplained by the monetary policy variables was 46% and this could only be explained by other variables that were outside the scope of this study. These findings are in line with that of Fatade (2004) who in studying the effect of monetary policy on performance of banks in Nigeria established that various monetary policy measures instituted in the country over the years have directly and indirectly affected performance of the banking sector in a number of ways while includes Banks profitability, Deposit/Savings mobilization Loans & Advances and so on. He further confirmed that the effectiveness of bank's performances depends on the instruments used in macroeconomic policies and the prevailing economic conditions and the deregulation of the sector has led to a number of improvements. . He further confirmed that the effectiveness of bank's performances depends on the instruments used in macroeconomic policies and the prevailing economic conditions and the deregulation of the sector has led to a number of improvements. In the year 2009, monetary policy still explained a significant variance on the profitability of commercial banks in Kenya but with a reduced percentage than what it was in 2008. In 2009 the variance explained was 49.2% which was less than half of the total variance on the profitability of the commercial banks. The same trend was replicated in the subsequent years 2009, 2010 and 2011 The findings further indicate that monetary policy variables such as the amount of investments in government securities; amount of funds commercial banks deposit with CBK and the average base rate of the CBK have a significant impact on the profitability of commercial banks in Kenya.

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