The relationship between loan portfolio composition and Financial performance of commercial banks in Kenya

Abstract

Lending has been, and still is, the mainstay of banks’ business, and this is more true to emerging economies like Kenya where capital markets are not yet well developed. To most of the transition economies, however, and Kenya in particular, lending activities have been controversial and a difficult matter. This is because business firms on one hand are complaining about lack of credits and the excessively high standards set by banks, while lending commercial banks on the other hand have suffered large losses on bad loans. The purpose of the study is to determine the relationship between loan portfolio and financial performance of commercial banks in Kenya. For the purposes of this study, the researcher used causal research design. The target population composed of 43 commercial banks in Kenya (CBK Handbook, 2008). The population of interest of this study was selected using simple random sampling method to come up with a sample size of thirty (30) commercial banks. For the purpose of this study, the researcher mainly used secondary data involved the collection and analysis of published material and information from other sources such as annual reports, published data. The study thus used inferential statistics in the data analysis whereby correlation, collinearity and logistic regression models were used. From the findings, the study concludes that there exists a relationship between loan portfolio and financial performance of commercial banks in Kenya as loan portfolios are the major asset of banks and other lending institutions. The study also concludes that every bank should strive to have the best loans mix as it was found that some types of loans (mortgage loans, business loans, government loans) have greater effects on financial performance of commercial banks. Therefore commercial banks should have a large percentage of mortgage loans, business loans and government loans compared to personal loans and educational loans to have the best loan portfolio mix for greater financial performance. The study further recommends that for commercial banks to remain profitable they should have good portfolio management which will help in making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. Portfolio management techniques in banks should focus more on strategic issues for a portfolio of projects and the ability to achieve strategic objectives.