Relationship Between Mortgage Interest Rate and Financial Performance of the Mortgage Firms in Kenya

Abstract

Banks are the most important financial intermediaries as they play a crucial role in the operation of most economies. The efficiency of financial intermediation can also affect economic growth. Economies that have a profitable banking sector contribute to the stability of the financial system. Therefore, it is important to understand the determinants of banking sector profitability. The objective of this study is to establish the relationship between mortgage interest rates and financial performance of mortgage firms in Kenya. To predict financial performance selected indicators were used. The predictor variables included; interest rate, credit risk, assets size, liquidity and expenses management. Financial performance was measured using Return on Assets (ROA). The study used secondary data sources to collect data from CBK, NSE and individual commercial banks. The researcher adopted a survey research design. The population for the study comprised of the commercial banks in Kenya offering mortgage, licensed commercial banks in Kenya as of 31 December 2009; and the data for the period between 2009 and 2012. Quantitative data collected was analyzed by the use of descriptive statistics and presented through means, median and standard deviation. The inferential analysis which includes regression analysis and correlation was done to establish the relationship between mortgage interest rate and financial performance of the mortgage firms in Kenya. Multiple linear regression analysis was conducted at 95% confidence level. The study established that there was a strong positive relationship between bank size and profitability of commercial banks offering mortgage in Kenya. However liquidity, interest rates, expenses management and credit risk had no significant effect on return on assets (ROA). These results suggest that banks can improve their profitability through effective management of the determinants with no significant influence on ROA. This study suggests that asset size is the most desirable determinant of ROA of commercial banks offering mortgage. Further research on financial performance of banks offering mortgage should be done since this is a field that has not been fully ventured. The study also recommends policies that would encourage commercial banks to adopt mortgage financing to enhance their profitability.