Abstract
This study investigated the effects of portfolio diversification on financial performanceof commercial banks in Kenya. A descriptive research design was adopted in this study.The study targeted all the 40 commercial banks registered and licensed under theBanking Act. Secondary data was used in this study to achieve the set objective. Thesecondary data obtained from CBK reports and annual published statements of accountsfor the commercial banks in Kenya between 2013 and 2017. Data was analysed usingdescriptive statistics and regression analysis. A significant strong positive correlationbetween Portfolio diversification and commercial banks performance was also noted (r= 0.632, p = 0.000, n = 40). This study revealed a weak positive correlation betweenbank size and commercial banks performance. This implies that an increase in banksize would lead to an increase in commercial banks performance. An increase in interestrate spread was found to lead to increase in financial performance of commercial banks.A weak positive correlation between interest rate spread and commercial banksperformance was established (r = 0.327, p=0.000 and N=40). This relationship wasfound statistically significant at p=0.000>0.05. Finally the study established asignificant relationship between asset quality and financial performance of commercialbanks. This implied that when, asset quality is increase by one unit it would led to anincrease in financial performance of commercial banks by 27.2%. A weak positivecorrelation between the asset quality and commercial banks performance was also noted(r = 298, p = 0.000, n = 40). The study concluded that portfolio diversification, sanksize, interest rate spread and asset quality has influence on the financial performance ofcommercials banks in Kenya and a positive correlation exist between portfoliodiversification, bank size, interest rate spread, asset quality and financial performance.The study therefore recommends that policy makers like capital markets authority topromote policies that encourage commercial banks to practice diversification tomitigate their financial losses and boost their profitability. The study recommends thatcommercial banks diversify their real estate finance schemes to make it reachable tomore customers since real estate had a significant effect of their financial performance.It also recommends that that commercial banks should extend their product mixes toincrease profitability through combination of traditional intermediation activities andnon interest activities. Also the study recommends that there is need to strengthen bankdiversification policy through effective and efficient regulation and supervisoryframework. This study recommends that a similar study should be carried out acrossEast Africa and beyond and see whether the same results would be replicated. Also, astudy should also be done on the importance of credit diversification on banksperformance.
Rights
Attribution-NonCommercial-NoDerivs 3.0 United States
