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.