dc.description.abstract | In the recent times, residential mortgage portfolio has received much attention from
academics, investors and managers as well as from policymakers. This is mainly
because of the different aspects through which mortgage portfolio components such as
portfolio size, portfolio quality and interest return can impact the performance of
commercial banks. This study sought to investigate the relationship between residential
mortgage portfolio, product innovation, firm characteristics and performance of
commercial banks in Kenya. The specific objectives were to establish the effect of
residential mortgage portfolio on bank performance; evaluate the effect of mortgage
product innovation on the relationship between residential mortgage portfolio and bank
performance; determine the effect of firm characteristics on the relationship between
residential mortgage portfolio and bank performance and examine the joint effect of
mortgage product innovation and firm characteristics on the relationship between
residential mortgage portfolio and bank performance. These objectives had a number
of corresponding hypotheses and sub-hypotheses which were tested to achieve the main
goal of the study. The study was anchored on the Modern Portfolio Theory, Agency
Theory and Asymmetric Information Theory. The study was guided by positivism
research philosophy and adopted a correlational descriptive research design. The study
collected and utilized panel data from the annual residential mortgage surveys conducted
by the Central Bank of Kenya (CBK) on commercial banks covering a thirteen-year
period from 2006 to 2018. Secondary data was collected from the financial statements
of commercial banks as submitted to the CBK and Kenya Bankers Association (KBA)
database. Data was analyzed using descriptive and inferential statistics. Hypotheses
were tested through panel regression models and the Baron and Kenny (1986) approach.
The results revealed that residential mortgage portfolio attributes, namely: portfolio
quality and interest return significantly influence bank performance. The effect of
mortgage term on the relationship between mortgage portfolio quality and bank
performance was negative and statistically significant. Loan to value (LTV) ratio was,
however, found not to significantly intervene the relationship between residential
mortgage portfolio and performance of banks operating in Kenya. For firm
characteristics, firm age had a significant moderating impact on the relationship between
interest return and bank performance, but does not moderate the relationship between
portfolio size as well as portfolio quality and bank performance. Finally, the study
revealed that product innovation and firm characteristics jointly affect the relationship
between residential mortgage portfolio and bank performance. Specifically, firm size
and firm age positively influences the relationships and these were statistically
significant. The study calls on bank managers to structure their mortgage quality and
interest return in a way that ensures better performance. Since mortgage product
innovation and bank characteristics influence the relationship between residential
mortgage portfolio and bank performance, the study recommends that bank managers
pay close attention to the institutional environment and product characteristics in
designing their mortgage loan portfolios. Up to 75% of residential mortgage portfolio
in Kenya is controlled by six (6) large banks. The inclusion of other banks in the study
therefore introduced the problem of missing values on some variables, which affected
the normality of the data and choice of the panel regression model to use. Future studies
should consider the use of residential mortgage portfolio as a composite variable based
on tested methodologies for more insight on bank performance. | en_US |