Effects of Portfolio Diversification on Financial Performance of Commercial Banks in Kenya

Abstract

This study investigated the effects of portfolio diversification on financial performance of commercial banks in Kenya. A descriptive research design was adopted in this study. The study targeted all the 40 commercial banks registered and licensed under the Banking Act. Secondary data was used in this study to achieve the set objective. The secondary data obtained from CBK reports and annual published statements of accounts for the commercial banks in Kenya between 2013 and 2017. Data was analysed using descriptive statistics and regression analysis. A significant strong positive correlation between Portfolio diversification and commercial banks performance was also noted (r = 0.632, p = 0.000, n = 40). This study revealed a weak positive correlation between bank size and commercial banks performance. This implies that an increase in bank size would lead to an increase in commercial banks performance. An increase in interest rate spread was found to lead to increase in financial performance of commercial banks. A weak positive correlation between interest rate spread and commercial banks performance was established (r = 0.327, p=0.000 and N=40). This relationship was found statistically significant at p=0.000>0.05. Finally the study established a significant relationship between asset quality and financial performance of commercial banks. This implied that when, asset quality is increase by one unit it would led to an increase in financial performance of commercial banks by 27.2%. A weak positive correlation between the asset quality and commercial banks performance was also noted (r = 298, p = 0.000, n = 40). The study concluded that portfolio diversification, sank size, interest rate spread and asset quality has influence on the financial performance of commercials banks in Kenya and a positive correlation exist between portfolio diversification, bank size, interest rate spread, asset quality and financial performance. The study therefore recommends that policy makers like capital markets authority to promote policies that encourage commercial banks to practice diversification to mitigate their financial losses and boost their profitability. The study recommends that commercial banks diversify their real estate finance schemes to make it reachable to more customers since real estate had a significant effect of their financial performance. It also recommends that that commercial banks should extend their product mixes to increase profitability through combination of traditional intermediation activities and non interest activities. Also the study recommends that there is need to strengthen bank diversification policy through effective and efficient regulation and supervisory framework. This study recommends that a similar study should be carried out across East Africa and beyond and see whether the same results would be replicated. Also, a study should also be done on the importance of credit diversification on banks performance.