Effects of Mortgage Financing on Financial Performance of Commercial Banks in Kenya

Abstract

One of the main activities of commercial banks in Kenya is lending and this can be enhanced by the loans that form the largest source of revenue for commercial banks and this affects its financial performance through generation of interest income earnings. However, Central bank of Kenya has put concerted efforts in ensuring the existence of a favorable financial environment for operation of commercial banks in the country which has meant that while some commercial banks are performing well, others have experienced declining fortunes and some have even been placed under receivership. Mortgage financing plays a significant role in poverty reduction in the economy and also provides an opportunity for financial institutions offering it to generate more revenue and grow. However, the adoption of mortgage financing has not been fully adopted by financial institutions leading to the institutions recording far from impressive financial performance levels. The study main objective was to determine the effect of mortgage financing on financial performance of commercial banks in Kenya. The theories that underpinned the study were Mortgage Value theory, Title Theory and Lien Theory of Mortgage, Modern Portfolio Theory and the market power theory. A descriptive research design was used for analysis. All commercial banks in Kenya were used as used as target population. The study used census technique. Secondary data collected using a data collection sheet from the financial reports of the commercial banks as well as CBK annual reports was used in the study. Since the data collected was quantitative, the study used descriptive and inferential analysis methods for analysis. Descriptive analysis entailed the use of means, standard deviation, percentages and trends in the study variables over the period of time. Both correlation and regression analysis were conducted. The findings revealed a positive significant effect of Amount of Mortgage Offered on financial performance. The study findings also indicated that Interest Charged on Mortgage has a positive and significant effect on financial performance of commercial banks. The study concluded that an increase in the Log of Amount of Mortgage Offered as well as other activities that augment the total value of mortgage loans extended by the commercial banks leads to a significant improvement in financial performance of the commercial banks in Kenya. The study also concluded that an increase in the Interest Charged on Mortgage leads to a significant improvement in financial performance of commercial banks in Kenya. The study recommended a need for commercial banks to increase the Amount of Mortgage Offered as well as other activities that augment the total value of mortgage loans extended in order to improve their financial performance. The commercial banks should also improve on the quality of mortgage products offered to enhance higher Mortgage loans uptake thereby improving their financial performance. Commercial banks should adjust their mortgage lending rates positively whenever they increase the Amount of Mortgage Offered which will in turn enhance their profitability leading to an improvement in financial performance. Increases in Interest Charged on Mortgage leads to growth in long-term mortgage loans hence improving financial performance.