The Effect of Portfolio Management on the Profitability of Commercial Banks in Kenya

Abstract

The main goal for banks is making profits from different assets or class of assets. However, some of these assets can be non-productive in terms of generating income directly. Banks like other investors need to categorize investments in divisions of each asset group that can have varied performances in varying market conditions and they need to examine the past history and projected outlook in terms of risk, return and correlation of each of those investments (Perez, 2015). Commercial Banks have embarked on portfolio management aimed at increasing their income sources. However, the impact of portfolio management on the commercial banks especially after the interest rate capping laws of Kenya remains unknown. Additionally, various researches provide important insight into effects of portfolio management of commercial banks, investment firms listed in the NSE and Insurance companies, the aspect of tenor, mix of deposits and sector concentration has not been explored. Hence this study sought to address this research gap. The study objective was to establish the effect of portfolio management on the financial performance of commercial banks in Kenya. The research is valuable to commercial bank managers as it informs them on necessary considerations to make while selecting the class of assets in a portfolio, the industry policy makers and contributes to a broader realm of academic research. This study used descriptive research design and explored a sample of all the eleven listed banks in Kenya which are licensed by Capital Markets Authority and trading at the Nairobi Securities Exchange. This was 27% of the entire population and represents 68% of the combined market share. The study used secondary data collected from the financial statements, other management reports and the bank supervisory report of the CBK for a period of four years from 2014-2017. Statistical Package for Social Sciences (SPSS) version 21.0 was be used in data analysis through a regression model. The resultant data was summarized and tabulated for ease of understanding and interpretation. The study established that 63% of the deviations in profitability of commercial banks was jointly accounted for by portfolio management aspects; liquidity, financial assets, tenor, deposit mix and sector concentration. The study findings established that the amount of financial assets and liquidity held by a commercial bank had a significant contribution to the profitability while tenor, deposit mix and sector concentration did not have a significant effect on the profitability of banks in Kenya over the study period.