INFLUENCE OF PORTFOLIO DIVERSIFICATION ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS LISTED ON NAIROBI SECURITIES EXCHANGE, KENYA

Abstract

Commercial banks and other entities in the financial sector have adopted portfolio diversification as a means of enhancing their overall financial performance. However, not all the products in their portfolios are very profitable, as the risk inherent in each of the products comprising of the portfolio vary. The objective of having a diversified portfolio is majorly to ensure the expected portfolio return is maximized for a given level of risk. As such, a knowledge gap still exists as to whether banking product diversification really enhances the financial performance of listed commercial banks in Kenya or not, hence the need for this study. In particular, the study sought to examine the influence of bancassurance, mobile banking and real estate finance on the financial performance of listed the commercial banks listed on the Nairobi Securities Exchange. This study was guided by three theories; Modern Portfolio Theory, Agency Theory and Diversification Strategy model. The study used a descriptive research design with a census method targeting the 11 listed commercial banks in Kenya. The study relied on both primary and secondary data obtained from respondents and the financial reports of the said banks to establish the relationship between the study variables. The data on the financial performance of the listed banks was collected using data collection sheets. The data was analyzed by the help of SPSS and the findings presented in tables using statistics such as frequencies, percentages, means, standard deviations. The study established that real estate finance (r = 0.640) had a positive and strong correlation with financial performance. Similarly, bancassurance (r = 0.177) and mobile banking (r = 0.201) had a positive and weak correlation with financial performance. The R2 value of 0.487 implies that 48.7% of the variations in the perceived financial performance can be explained by the variations in independent variables. The study recommends that listed commercial banks should diversify their real estate finance schemes to make it reachable to more customers since real estate had a significant effect of their financial performance.