Vol. 5, Issue 5 (2020)
Effect of portfolio diversification on financial performance of commercial banks listed at Nairobi stock exchange
Author(s): Kemuma Gabriella
Abstract: Commercial banks play a significant role in the growth of a country. A progressively sound and active banking system is an essential necessity for economic growth. The general objective of this study was to investigate the effect of portfolio diversification on financial performance of commercial banks listed at NSE. The specific objectives of the study were to: examine the effect of Real estate financing on financial performance of commercial banks listed at NSE, determine the effect of Insurance investments on financial performance of commercial banks listed at NSE and determine the effect of bond investments on financial performance of commercial banks listed at NSE. This study was informed by the following theories; Modern Portfolio Theory, Agency Theory and Diversification Strategy model. The study adopted a survey descriptive design. The study targeted all the 11 commercial banks listed at NSE. It relied on secondary data obtained from the audited and published financial reports of the listed banks for a period 2013 - 2018. Data was collected using data collection sheets. Data was analyzed using descriptive statistics such as percentages, mean, frequencies and standard deviation. Correlation matrix analyzed the association between dependent variable and the independent variable. Tables, charts, and graphs were used to present quantitative data. The study findings revealed that a unit increase in real estate financing and insurance investments by the banks producing a corresponding growth in ROE and ROA by 0.0% and 0.0% respectively. On the other hand, a unit change in bond investments by the listed banks led to a 0.5% and 0.1% increase in ROE and ROA respectively. Overall, these results provide enough evidence to conclude that both real estate financing and insurance investment do not have any significant effect on financial performance whereas the investment on bond has a positive impact on the financial performance of commercial banks. This study demonstrates that there are good reasons for commercial banks to consider specializing in new portfolio. Bonds are attractive options from a financial investment perspective for commercial banks over the long run as they offer viable diversification possibilities for the banks over time and across the business cycle. The study recommendation is the need for creating more awareness across private and corporate investors to facilitate greater participation in the bond portfolio of commercial banks in Kenya. This enhances understanding among people who are not well versed with the role and benefits offered by corporate bonds.