The Relationship Between Loan Portfolio and Financial Performance of Tier 1 Commercial Banks in Kenya.

Abstract

This study investigated the relationship between loan portfolio components and the financial performance of tier one banks in Kenya, measured by Return on Assets (ROA). The research was guided by financial intermediation theory and modern portfolio theory, which highlight the role of financial institutions in efficiently allocating resources, managing risks, and diversifying portfolios to optimise returns. The study focused on four key objectives: to examine the effects of loans to financial institutions, corporate loans, public institutions loans, and retail loans on financial performance. Secondary data from nine tier one banks over a 13-year period (2011–2023) was analysed using regression techniques. The findings indicated that corporate loans had a strong positive and significant relationship with ROA. Public institutions loans was also found to have statistically significant relationship with ROA. However, loans to financial institutions and retail loans were found to have no significant relationship with financial performance of Tier one banks in Kenya. The study concludes that financial performance of tier one commercial banks is largely dependent on the corporate and public institutions loan portfolios. This study recommends that tier one banks in Kenya should prioritize corporate and public institutions lending strategies as a way to increase their financial performance.