Financial Asset Allocation and the Financial Performance of Commercial Banks in Kenya

Abstract

The aim of this study was to establish the effect of financial assets allocation on the performance of commercial banks in Kenya. Cross-sectional and time series were combined between the financial years 2000 to 2012 to establish the relationship between financial asset allocation and profitability of commercial banks in Kenya. The researcher made use of secondary data on financial asset allocation, macro-economic factors and return on assets from 2000-2012. A regression analysis was conducted in order to be able to establish the relationship. It can be concluded from the study that investments in securities offered the highest returns other factors held constant in the period under review, these securities are perceived to be high risk-high returns assets class. Investments in securities among commercial banks are very low representing less than 1% of asset allocation. Most banks are risks averse hence are not attracted by risky assets. In the period under review there was tremendous development of capital markets in Kenya. Advances represented the highest percentage of asset allocation at 51.90% to total assets among commercial banks in Kenya. High lending rates offered by commercial banks in Kenya have resulted to increase in non-performing loans and low economic growth. The study recommends that the government through the Central Bank of Kenya should further deepen the financial market and incorporate derivatives this will not only ensure high returns liquid assets but also mitigate risk. Introduction of options in our financial market particularly stock market will enable commercial banks acquire high-returns and low risk assets. This will cushion commercial banks in low lending and government securities yields. In order for the commercial banks to lend at affordable rates and stimulate economic growth the study recommends an introduction of tax on lending at 5% above the Central Bank Rate.