Effect Of Portfolio Diversification On Financial Performance Of Commercial Banks In Kenya. The Moderating Role Of Capital Adequacy

Abstract

The concept of portfolio diversification is foremost and has taken global center stage while ascertaining the financial performance of commercial banks. In the global business world is paramount constituent in regard to making investment commitments. This is due to increased profitability, reduction in risk, higher growth among others that accrue from diversification. The general objective of the study was to evaluate effect of portfolio diversification on financial performance of commercial banks in Kenya, the moderating role of capital adequacy. The study focused on five specific objectives to determine the effect of mortgage investment, foreign exchange trading, Government investment securities, bancassurance investment and moderation of capital adequacy and financial performance of commercial banks. Modern portfolio theory and prospect theory guided the study. The study was anchored on the positivist research paradigm. The study adopted descriptive research design, correlational design and panel data analysis. Target population was forty-three commercial banks in Kenya. Sample size of 11 listed commercial banks was used. The study collected secondary data through data collection sheet from 2009-2018. Data analyzed through descriptive statistics, in this respect, frequency distribution percentage; minimum, maximum, mean and standard deviation, skewness and kurtosis were used. Results were presented in tables, charts and figures. Regression analysis was conducted through STATA and 5 percent was set as significance level with 95% confidence level. Study findings will be significant to the commercial banks managers who will be informed the position to leverage their resources towards sectors with resounding returns as opposed to others. Further study will present a window for new scholars to conduct new studies. The study found that mortgage investment; foreign trading exchange and government investment securities had positive significant effect on financial performance. However, the study reveals that bancassurance investment had insignificant influence on financial performance. Finally, the study found that capital adequacy moderate’s portfolio diversification to impact financial performance of banks. However, moderation effect was to limited extent considering the R squared change of 3.15 percent. The study concluded that mortgage investment, foreign exchange trading and government securities investment was statistically significance with financial performance while bancassurance investment was not statistically significance. Further, the study concluded that the robustness of portfolio diversification to impact performance was substantial as compared to moderation effect of capital adequacy since 78 percent contribution to performance was accounted by portfolio diversification and after moderation 81 percent change in performance was explained. The study recommended the commercial banks to embrace portfolio diversification as technique of enhancing performance. Further recommendation was given banks to ensure proper selection and combination of portfolio to reap diversification rewards since not all assets has positive effect on performance.