Sectoral Credit Portfolio Diversification and Financial Performance of Commercial Banks in Kenya

Stephen Githaiga Ngware^1, , Willy Muturi¹ and Tobias Olweny¹

¹School of Business, Department of Economics, Accounting and Finance, Jomo Kenyatta University of Agriculture and Technology, P.O. Box 62000, 00200, City Square, Nairobi, Kenya

Cite this paper:
Stephen Githaiga Ngware, Willy Muturi and Tobias Olweny. Sectoral Credit Portfolio Diversification and Financial Performance of Commercial Banks in Kenya. Journal of Finance and Economics. 2019; 7(4):127-136. doi: 10.12691/jfe-7-4-3

Abstract

The current balance sheet being the starting point, this study builds a multi-objective approach to move to an optimal balance sheet while at the same time putting into consideration the constraints that face the banks. Considering the nature of banking and their operations, banks do not have enough deposits to ensure that there is a guarantee of fulfilling requirements by regulatory authorities of liquidity. For this reasons, Banks are exposed to portfolio diversification losses if they fail to effectively and efficiently recover loans advanced to customers. An alarm is therefore, raised by this scenario which is very critical to the role of banks in intermediation. The sectoral credit diversification as a strategy in the context of Kenya was therefore assessed whether it enhances bank profitability. The study adopted correlational research design. The 43 commercial banks licensed by Central Bank of Kenya by December 2017 were the target population of this study. The study analyzed Time Series Cross Sectional unbalanced secondary panel data obtained from Kenya National Bureau of Statistics, World Bank website, Central bank of Kenya, published financial accounts statements of all the 43 commercial banks in Kenya, and the Banking survey publications for fifteen years ranging from 2003 to 2017. Sectoral credit diversification to the four sectors was found to have a significant positive effect on financial performance in Kenya. The study recommended that Commercial banks in Kenya should devise measures geared towards consolidation of credit information and data which would aid in management and provision of credit services amongst different stakeholders and distribution of credit across various sectors of the economy.

Keywords:
portfolio diversification sectoral credit diversification dynamic panel model fixed effect Return on Asset (ROA) Return on Equity (ROE)

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