The Effect of Asset Diversification on the Financial Performance of Commercial Banks in Kenya
Abstract
The main goal is to banks is making profits from different types of assets. However, some of these
assets can be non-productive in terms of generating income directly. 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. Commercial Banks have embarked on diversify their
assets aimed at increasing their income sources. However, the impact asset diversification has on
the commercial banks remains unknown. The study objective was to determine the effect of asset
diversification on the commercial banks financial performance focusing on Kenyan context. The
study is valuable to commercial bank managers as its focus is on the effect of asset diversification
on the financial performance of commercial banks in Kenya. The findings would inform the
managers on necessary considerations to make while selecting the degree of asset diversification.
Further, study is valuable to the policy makers and the government institutions that regulate the
banking sector in Kenya. Finally, the study contributes to the broader realm of academic research.
Although various researches provide important insight into diversification, few research works
examined asset diversification. Additionally, some studies focused solely on asset allocation and
quality. Hence this study sought to fill this research gap.
This study used descriptive research design and the population of this study was 43 commercial
banks in Kenya. Secondary data on financial performance and asset diversification was collected
from commercial banks’ annual reports. The study was limited to a time scope of 5 year starting
2011 to the year 2015. Quantitative data gathered was analyzed descriptively and used of
inferential statistics. Further, Statistical Package for Social Sciences (SPSS) version 21.0 aided in
data analysis.
The research findings were presented using tables and figures. Analytical model was generated to
show link between the research variables whereby it emerged that 64.6% of the variations in
financial performance of commercial banks was accounted by other investments, financial assets,
cash and cash equivalent and loans. Further, the constant of the model was -0.09748 units which
implied a negative financial performance. Further, holding other factors constant, a unit change in
financial assets would change financial performance of commercial banks by 0.00162 units. When
all the other factors are held constant, a unit increase in loans increases financial performance of
commercial banks by 0.00179 units. Similarly, a unit increase in cash and cash equivalent holding
other factors constant increased financial performance of commercial banks by 0.00136 units.
Finally, a unit change in other investments holding the rest of the factors constant changes
financial performance of commercial banks by 0.00067. It is recommended to the commercial
bank managers to put into place strategies and plans that prevents such fluctuations given that cash
and cash equivalents are key assets to banks. Further, it is recommended to commercial bank
managers to reviews existing assets diversification plan, specifically on other investments in order
to realign them. The researcher recommends for further research into the cash and cash
equivalents, and other investments diversification in banks in order to have an exhaustive
knowledge of the reasons behind declining trend in year 2015.
Publisher
University Of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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