The Effect of Real Estate Finance on Financial Performance of Commercial Banks Listed on the Nairobi Securities Exchange
Abstract
It is generally observed that commercial banks’ lending criteria are pro-cyclical in
nature. This means that their lending criteria are not very strict in a real estate boom
while during the bust they are very strict. As a result of this,commercial banks are
more likely to underestimate the default risk of real estate loans during a real estate
boom. Such a situation leads to real estate price inflation and this increases the banks’
credit risk exposure to the real estate. When there is a sharp drop in real estate prices,
commercial banks that have a high proportion of real estate loans in their portfolios or
loans to other financial institutions that specialize in real estate lending suddenly find
themselves faced by a high exposure to real estate risk. This therefore affects their
financial performance in a significant manner. As a result, the country's financial
system becomes at risk and exposed. The study sought to evaluate the effects of real
estate finance on the financial performance of listed commercial banks in Kenya. This
study adopted a descriptive research design.The population of this study was all the 11
listed commercial banks in Kenya. For the purposes of this study, only secondary data
was used. The secondary data was sourced from the annual reports that are available
from their websites, the NSE and the Central bank of Kenya website. Data was
collected for a period of 5 years from 2009-2013 since most of the other studies have
used a similar period. Then, the study used descriptive statistics and inferential
statistics to establish the relationship between the variables and financial performance
of commercial. The results showed that the model explained 59% of the variance in
financial performance as given by the value of R2. The model was also fit to explain
the relationship as the F-statistic of 5.598 was significant at 5% level, p = 0.000. The
major finding of the study was that mortgage finance had a strong negative effect on
the financial performance of listed commercial banks in Kenya, β = -2.147, p = 0.054.
Further, liquidity and cost of operations also had a strong effect on the financial
performance of commercial banks. The study concludes that real estate finance
influence the financial performance of listed commercial banks in Kenya. The study
recommends that commercial banks be wary of the way mortgage financing affects
their financial performance. The current levels of mortgage finance have not
improved the financial performance of banks and it may therefore be necessary to
examine how mortgage finance can be used to improve the financial performance of
banks in Kenya.
Publisher
University of Nairobi