Effect of Asset Based Financing on Loan Portfolio Performance in Commercial Banks in Kenya

Abstract

Today, commercial banks are appreciating the significance of asset-based financing and reduced risk associated with an asset-based financing while considering increasing the amount of the credit line in their loan portfolio as a method of improving the loan portfolio performance. The objective of this study was to determine the effect of asset-based financing on performance of loan portfolio among commercial banks in Kenya. The study utilized a descriptive research design to test hypothetical relationships amongst variables. This research was guided by the following theories: Financial Intermediation Theory, Commercial-Loan theory and Credit Market Theory. The population comprised of 43 commercial banks as at 31st December, 2017 that were operational in the study period. Secondary sources of data spanning for a period between 2012 and 2016 were used. Diagnostic tests and descriptive statistics were carried out afterwards inferential statistics: correlation analysis and regression analysis were applied in hypothesis testing. From the descriptive results, the study concluded that the study variables: mortgage outstanding, customer deposits, bank size, profitability and liquidity recorded significant increases in the duration of the study. These increases were largely attributed to use of technology and innovation and continuous training and development programs. Correlation results depicted a weak and moderate correlation between size of the bank and loan portfolio. There lacked a correlation between mortgage outstanding, ROA, customer deposits, liquidity with loan portfolio. Regression model utilized under the study was found to be significant. Bank size and mortgage outstanding were statistically significant while customer deposits, liquidity and ROA were insignificant. Thus, the study recommends that need for commercial banks to effectively employ credit policies to minimize non-performing loans and default risks. It would also be necessary for commercial banks to continue investing in modern technologies such as information communication technologies so as to boost efficiency and minimize operational costs. The main limitation for this study was that the researcher utilized secondary sources of data which could easily get altered and manipulated and thus impact negatively on the findings. Due to resources and time constraints, this study was limited to duration of 5 years only. Future researchers should think of doing a replica of this research covering a longer period of time like 20 years, this way the researcher can accurately be able to detect nature of existing relationships amongst variables.