influence of portfolio diversification on financial
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INFLUENCE OF PORTFOLIO DIVERSIFICATION ON FINANCIAL
PERFORMANCE OF COMMERCIAL BANKS LISTED ON NAIROBI
SECURITIES EXCHANGE, KENYA
AGNES CHEPKORIR
A RESEARCH PROJECT SUBMITTED TO SCHOOL OF BUSINESS IN
PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF
MASTERS DEGREE IN BUSINESS ADMINISTRATION OF JOMO
KENYATTA UNIVERSITY OF AGRICULTURE
AND TECHNOLOGY
MAY, 2018
ii
DECLARATION AND APPROVAL
DECLARATION
This project is my original work and has not been presented for the award of a degree
in any other university
Signature ……………………. Date ……………………
AGNES CHEPKORIR
HD333-C007-4262/2014
APPROVAL
This Project has been submitted for examination with my approval as the university
supervisor
Signature ……………………. Date ……………………
Mr. ROBERT MUGO
Lecturer,
JKUAT
Signature ……………………. Date ……………………
Dr. DANIEL WANYOIKE
JKUAT, NAKURU
iii
DEDICATION
I dedicate this work to my dear family for their love and moral support during the
entire period I was committed.
iv
ACKNOWLEDGEMENT
I thank all people whose thoughts, insights, and ideas were helpful in this project
writing. In particular, I wish to express my gratitude to my supervisor Mr. Robert
Mugo for his encouragement, guidance and support. I also appreciate the teaching
staff of Jomo Kenyatta University of Agriculture & Technology without whose
knowledge, wisdom and insightful thoughts this project would not have been
successful. My family, friends and classmates also deserve a special mention on this
page for their unreserved moral support and encouragement.
v
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.
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TABLE OF CONTENTS
DECLARATION AND APPROVAL ........................................................................ ii
DEDICATION............................................................................................................ iii
ACKNOWLEDGEMENT ......................................................................................... iv
ABSTRACT ..................................................................................................................v
TABLE OF CONTENTS .......................................................................................... vi
LIST OF FIGURES ................................................................................................. viii
LIST OF APPENDICES .............................................................................................x
LIST OF ABBREVIATIONS AND ACRONYMS ................................................. xi
DEFINITION OF TERMS....................................................................................... xii
CHAPTER ONE:INTRODUCTION .........................................................................1
1.1 Background of the Study .........................................................................................1
1.2 Statement of the Problem .........................................................................................5
1.3 Objectives of the Study ............................................................................................6
1.4 Hypotheses of the Study ..........................................................................................6
1.5 Justification of the Study .........................................................................................7
1.6 Scope of the Study ...................................................................................................7
CHAPTER TWO:LITERATURE REVIEW ............................................................8
2.1 Introduction ..............................................................................................................8
2.2 Theoretical Review ..................................................................................................8
2.3 Empirical Review...................................................................................................10
2.4 Conceptual Framework ..........................................................................................21
2.5 Summary of Reviewed Literature ..........................................................................22
2.6 Research Gaps ........................................................................................................22
CHAPTER THREE:RESEARCH METHODOLOGY .........................................25
3.1 Introduction ............................................................................................................25
3.2 Research Design.....................................................................................................25
3.3 Target Population ...................................................................................................25
3.4 Data Collection Instruments ..................................................................................25
3.5 Pilot Testing ...........................................................................................................26
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3.6 Data Collection Procedure .....................................................................................27
3.7 Data Processing and Analysis ................................................................................27
CHAPTER FOUR:RESEARCH FINDINGS AND DISCUSSIONS ....................28
4.1 Introduction ............................................................................................................28
4.2 Response Rate ........................................................................................................28
4.3 Respondents’ Profile ..............................................................................................28
4.4 Findings of the Study Variables .............................................................................31
4.5 Correlation Analysis ..............................................................................................36
4.6 Regression Analysis ...............................................................................................38
CHAPTER FIVE:SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
......................................................................................................................................41
5.1 Introduction ............................................................................................................41
5.2 Summary ................................................................................................................41
5.3 Conclusions ............................................................................................................42
5.4 Recommendations ..................................................................................................44
5.5 Suggestions for Further Studies .............................................................................44
REFERENCES ...........................................................................................................45
APPENDICES ............................................................................................................48
viii
LIST OF FIGURES
Figure 2. 1: Conceptual Framework ........................................................................... 21
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LIST OF TABLES
Table 3.1: Reliability Test ........................................................................................... 26
Table 4.1: Distribution of Respondents by Gender..................................................... 29
Table 4.2: Distribution of Respondents by Age .......................................................... 29
Table 4.3: Distribution of Respondents by Educational Level ................................... 30
Table 4.4: Distribution of Respondents According to Working Experience .............. 30
Table 4.5: Distribution of Respondents According to Portfolio Experience .............. 31
Table 4. 6: Influence of Bancassurance on Financial Performance ............................ 32
Table 4.7: Influence of Mobile Banking on Financial Performance ........................... 33
Table 4.8: Influence of Real Estate Finance on Financial Performance ..................... 34
Table 4.9: Financial Performance ............................................................................... 35
Table 4. 10: Correlation Analysis for Perceived Performance ................................... 36
Table 4. 11: Correlation Analysis for ROA ................................................................ 37
Table 4. 12: Correlation Analysis for ROE ................................................................. 38
Table 4. 13: Regression Model Summary ................................................................... 38
Table 4. 14: Multiple Regression Analysis ................................................................. 39
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LIST OF APPENDICES
Appendix 1: Letter of Introduction ............................................................................. 48
Appendix 2: Research Questionnaire ......................................................................... 49
Appendix 4: Research Authorization Letter ............................................................... 58
Appendix 5: Research Permit ..................................................................................... 59
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LIST OF ABBREVIATIONS AND ACRONYMS
CAMEL: Capital Adequacy, Management Performance, Earnings Performance
Liquidity
CBK: Central Bank of Kenya
EPS: Earnings per Sahre
NPM: Net Profit Margin
NSE: Nairobi Securities Exchange
ROA: Return on Assets
ROE: Return on Equity
SPSS: Statistical Package for Social Sciences
xii
DEFINITION OF TERMS
Bancassurance: selling both banking and insurance services by the same corporate
entity (Yan, Talavera, & Fahretdinova, 2016)
Financial Performance: the degree to which a business can utilize its assets to
realize increased revenues and turnovers. It is the ability of an entity to operate
profitably, efficiently and effectively, withstand environmental threats, exploting the
available opportunities and the ability to grow (Khrawish, 2011)
Mobile Banking: a service offered by the bank that uses mobile telecommunication
networks as a platform to perform traditional banking such as transferring money,
checking account balance, making payments and transferring money between
accounts (Dirnhofer, 2012)
Portfolio Diversification: the process of bringing together diverse assets to lower the
general risk associated with the entire portfolio of an organization (Arora & Jain,
2013)
Real Estate Finance: the provision of finance or capital for housing purchase, for
building, construction of housing, or the resources requisite for acquiring or accessing
housing projects by household or credit offered against some collateral (Peng et al.
2015)
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CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Competition and excessive risk in the financial sector have risen steadily leading to
financial crises in many parts of the world. As a result, this triggered the development
of literature on ways to minimize risk in financial intermediation and improve
financial stability of banks. A number of approaches and strategies to effective risk
management in the financial sector have been adopted. Various 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 ensure the expected portfolio return is maximized for a given level of risk.
A lot of research on banking diversification is drawn from cases on the United States
of America’s market and other developed economies, unlike the less developed and
emerging economies. Makokha, Namusonge and Sakwa (2016) studied the effects of
portfolio diversification on commercial banks’ financial performance in Kenya. Yan,
Talavera, and Fahretdinova (2016) also did a study to establish the effect of product
diversification on bank performance considering evidences from Azerbaijan while
Rop, Kibet, and Bokongo (2016) examined the effect of investment diversification on
the financial performance of commercial banks in Kenya. Besides, a study done by
Mutega (2015) sought to examine the effect of asset diversification on the financial
performance of commercial banks in Kenya while Mwara and Okello (2016) assessed
the use of diversification strategy in enhancing the competitive performance of Euity
Bank in Kenya. Otieno and Moronge (2014) also examined the influence of product
diversification on financial performance of selected commercial banks in Kenya.
Commercial banks in Kenya have lately expanded and thus opened up many branches
and agency banking outlets. This has tremendously increased the banks’ deposits,
transactions, operational activities and thus led to a rise in volumes of banking and
investment portfolios. As a matter of fact, the increasing number of banking portfolios
presents both risks and returns thereby necessitating the need for an optimal set of
banking portfolio that minimizes risks while maximizing returns. As such, finance
2
managers in the banking industry are under pressure to find the best strategy to raise
returns while minimizing losses in order to improve overall financial performance of
the banks (Makokha, Namusonge, & Sakwa, 2016). Diversification is a portfolio
strategy that is designed and pursued in the banking industry to cut down on risk,
increase bank revenues, reduce volatility of profits and enhance the overall bank
performance by combining various investments, assets or products. According to Rop,
Kibet and Bokongo (2016) banks enhance their financial performances by
diversifying their incomes from both interest income and non-interest income in their
portfolios. The non-interest income include share trading financial gains,
bancassurance income, dividend financial gains, commercialism activities gains, as
well as fees and commissions on banking products other than interest charges.
1.1.1 Banking Portfolio Diversification
Portfolio diversification is a way of managing a given portfolio by diminishing
instability and risk of a given set of portfolio of a given set of unlike investments,
assets or products (Mutega, 2015). It entails the process of bringing together diverse
assets to lower the general risk associated with the entire portfolio of an organization.
Diversification of an organization’s portfolio is necessary for maximum revenue
realization given some minimum risk is allowed by a combination of different classes
of elements of a particular portfolio. Banking diversification is pursued to mitigate the
turbulent markets and operational environments and further to lower portfolio
volatility and losses. Every bank seeks to enhance their financial performance by
diversifying their incomes from both interest financial gains and non-interest income
in their respective portfolios. The non-interest income elements that are often
considered for portfolio diversification include share trading financial gains,
Bancassurance income, dividend financial gains, commercialism activities gains, and
fees as well as commissions on banking products other than loan-related interest
charges.
A number of studies have been done on portfolio diversification (Yan, Talavera &
Fahretdinova, 2016; Makokha, Namusonge & Sakwa, 2016; Rop, Kibet & Bokongo,
2016). Yan, Talavera and Fahretdinova (2016) studied the effects of product
diversification on profitability of commercial banks in Azerbaijan using data for six
different types of loans and four types of deposits. The findings of the study revealed
a negative relationship between loan-based portfolio diversification and bank
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profitability. In addition, the study also indicated that the deposit-based diversification
had a marginally significant and positive correlation with profitability of the banks
considering that bank specific characteristics as well as economic and institutional
environments. In a study done by Makokha, Namusonge, and Sakwa (2016) the
dimensions of banking diversification identified include loans, deposits, assets, and
geographical portfolios. The study majored on asset diversification and established a
significant positive linear relationship between portfolio diversification and financial
performance among commercial banks in Kenya.
1.1.2 Financial Performance of Listed Commercial Banks
Attaining maximum level of profitability is the ultimate goal pursued by commercial
banks just like other business organizations. As Ongore and Kusa (2013) observe,
every strategy designed and undertaken by commercial banks seeks to achieve this
particular objective. However, this does not necessarily imply that the banks do not
pursue other goals since they could as well have other social and economic goals and
objectives. In this study, though, the main area of interest insofar as financial
performance of commercial banks is concerned remains the profitability attained by
the banks. The main indicators of financial performance to be studied in this case
include Return on Asset (ROA), Return on Equity (ROE) and Net Interest Margin
(NIM).
According to Ojiambo (2014) ROA is a ratio of a bank’s income to its assets that
shows how efficiently the organization’s resources are utilized to generate income.
This ratio indicates the level of efficiency of a bank in generating revenues from all
the resources at its disposal. On the other hand ROE explains the amount of profit
earned by an organization in relation to the firm’s value of equity. The ROE is
computed as a ratio of an organization’s net income to the total equity capital while
NIM measures the difference between the interest income generated by an
organization and the amount of interest paid out to the organization’s lenders relative
to their asset value (Khrawish, 2011). The NIM is computed as a percentage of
interest earned on loans and other assets minus interest paid on debt divided by the
average value of assets on which the income is earned over a specified period.
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1.1.3 The Banking Industry in Kenya
The Kenyan Banking Industry is currently governed by the Companies Act (CAP
486), Banking Act (Cap 488), Central Bank of Kenya (CBK) Act (Cap 491),
Insolvency Act of 2015 and other regulatory guidelines issued by CBK. The industry
was liberalized in 1995 when exchange controls were lifted. The banking sector in
Kenya falls under the ministry of finance which formulates and implements monetary
policy and fosters liquidity, solvency and proper functioning of the industry. The
industry comprises 40 licensed commercial banks since Giro Commercial Bank has
been acquired by I&M Holdings and Diamond Trust Bank Kenya is in the process of
acquiring Habib Bank Limited Kenya, while Chase Bank and Imperial Bank are in
receivership. There is also 1 licensed mortgage finance institution, 7 authorized non-
operating holding companies. Besides, there are 12 deposit-taking microfinance
banks, 30 non-regulated credit-only micro-finance institutions, 5 mobile money
operators, 86 foreign exchange Bureaus, 199 registered savings and credit co-
operatives and 3 credit reference bureaus (Cytonn, 2017). The banks have unionized
to form Kenya Bankers Association (KBA), an organization that lobbies for the
banks’ interests and addresses issues affecting the members. Some banks have
recorded impressive performance over time while others have encountered the
negative impact associated with the turbulent financial sector and hence performed
dismally or even got out of track. Due to increasing competition and constant
innovation, commercial banks have had to diversify their product portfolios in order
to be profitable and remain relevant in business. For instance, Chase Bank and
Imperial Bank have been put under receivership while others like Habib Bank
Limited, Equitorial Commercial Bank and Giro Commercial Bank have been acquired
by better performing banks.
1.1.4 Commercial Banks Listed on the Nairobi Securities Exchange in Kenya
The Nairobi Securities Exchange (NSE) is a leading African Exchange based in
Kenya. The NSE lists both equity and debt securities while offering world class
trading facility for local and international investors. The exchange palys a pivotal role
in Kenya’s economic growth by encouraging savings and investments as well as
enhancing access to cost-effective capital. To be listed on the exchange, there are a
requirements and regulations that an organization has to satisfy. Some of the
organizations listed on NSE are broadly classified into: agricultural companies;
5
entities dealing in automobiles and accessories; banking institutions; Investment
companies; Insurance companies; Energy and Petroleum entities; commercial and
services as well as Costruction and Allied companies. Out of the 40 licensed
commercial banks operating in the Kenyan financial sector, only 11 commercial
banks are listed on the Nairobi Securities exchange. The listed banks include KCB
Bank Group Ltd, Barclays Bank Ltd, Diamond Trust Bank Kenya Ltd, National Bank
of Kenya Ltd, NIC Bank Ltd, Standard Chartered Bank Ltd and Co-operative Bank of
Kenya Ltd among others.
The Banking sector in Kenya has experienced insignificant growth with listed banks
recording Earnings Per Share (EPS) growth in the financial year 2016 rated at 4.4%
compared to 2.8% in the previous financial year and a 5 year average of 13.9%.
Besides, the banks gross loans and advances as well as deposits grew at slower rates
compared to the expected five year average growth rate of 14.6%. According to a
survey done by Cytonn Investments (2016) the dismal performance emanated from
provision of non-performing loans, decline in private sector growth and liquidity
challenges.
1.2 Statement of the Problem
The global banking industry and financial sectors have experienced turbulent market
conditions, market deregulation, stiff competition, technological advancements and
reduced trade barriers thereby necessitating banking product diversification. As such,
many commercial banks have resorted to diversifying their portfolios in order to stay
afloat and maintain or enhance their profitability. Nonetheless, bank performance still
remains to be an issue of concern since, lately, not all the banks have maintained or
significantly improved their performances (Otieno, & Moronge, 2014). Whereas a
number of studies have been conducted in developed economies on the influence of
product diversification on bank performance, scanty empirical evidence exists on the
developing economies like Kenya. However, there is evidence to the effect that the
Banking sector in Kenya has experienced insignificant growth and unstable financial
performance. For example, the aggregate financial performance of the banking sector
in Kenya has been recorded below the industry estimates since in less than a year,
some banks have registered poor performance, three banks have been put under
receivership and others acquired. However, listed commercial banks have recorded
Earnings Per Share (EPS) growth in the financial year 2016 rated at 4.4% compared
6
to 2.8% in the previous financial year and a 5 year average of 13.9% still falling
below the expected 14.6% growth rate. Besides, the banks gross loans and advances
as well as deposits grew at slower rates compared to the expected five year average
growth rate of 14.6% despite the attempts by the banking sector to resuscitate the
banks’ financial performance through portfolio diversification. 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.
1.3 Objectives of the Study
This study was based on one general objective and three specific objectives
1.3.1 General Objective
The general objective was to determine the influence of Bank Portfolio
Diversification on Financial Performance of Commercial Banks Listed on Nairobi
Securities Exchange
1.3.2 Specific Objectives
The study was guided by the following specific objectives:
i. To determine the influence of Bancassurance on Financial Performance of
Commercial Banks Listed on Nairobi Securities Exchange
ii. To find out the influence of Mobile Banking on Financial Performance of
Commercial Banks Listed on Nairobi Securities Exchange
iii. To determine the Influence of Real Estate Finance on Financial Performance of
Commercial Banks Listed on Nairobi Securities Exchange
1.4 Hypotheses of the Study
The study was guided by the following hypotheses:
i. Ho1: Bancassurance does not significantly influence Financial Performance of
Commercial Banks Listed on Nairobi Securities Exchange
ii. Ho2: Mobile Banking has no significant influence on Financial Performance of
Commercial Banks Listed on Nairobi Securities Exchange
iii. Ho3: Real Estate Finance does not significantly influence Financial Performance
of Commercial Banks Listed on Nairobi Securities Exchange
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1.5 Justification of the Study
This study will be critical to the Banking industry and financial systems in Kenya, the
Kenya Bankers Association, finance experts, banking staff, and financial
intermediation stakeholders as it will justify the rationale for the adoption of strategic
banking product diversification for enhanced financial performance. It will also be
important to the general public as it sensitizes people on the need to embrace the
diversified bank products to increase faster access to dependable and cost-effective
financial services. It will also be of great importance to the Nairobi Securities
Exchange and investors interested in enhanced financial performance of the listed
commercial banks. The study will also be of help to scholars as it builds on the
literature on enhancing the financial performance of banks through product
diversification.
1.6 Scope of the Study
The study was conducted in Nairobi in 11 commercial banks listed on the NSE and
involved the management staff in charge of the portfolios under study who will
provide first-hand information on the respective bank performance. Besides, the
researcher also relied on published secondary data on financial performance and the
related performance drivers. The study was carried out for a period of six months
beginning September, 2017 to February, 2018 with a budget of Ksh 90,000.
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CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This chapter provides a review of the information from other scholars who have
conducted research in similar field of study. The areas covered in this chapter include
a review of literature on theories that guide the study, empirical studies related to the
influence of Portfolio diversification on financial performance of listed commercial
banks, conceptual framework, summary of the reviewed literature and research gaps
that exist.
2.2 Theoretical Review
This study will be guided by three theories; Modern Portfolio Theory, Agency Theory
and Diversification Strategy model.
2.2.1 Modern Portfolio Theory
The Modern Portfolio Theory (MPT) is a theory of portfolio choice developed by
Harry Markowitz (1952). The MPT is a sophisticated investment decision approach
that aids in classifying, estimating and controlling both the kind and amount expected
risk and return. There are a number of government activities and projects that can be
organized into portfolios, each with its own budget consistent with the MPT used in
financial decision making and asset management under conditions of risk and
uncertainty (Khan & Hildreth, 2002). The theory attempts to maximize portfolio
expected return for a given level of portfolio risk or equivalently minimize risk for a
given level of expected return, by carefully choosing proportions of various assets
(Fabozzi, Gupta, & Markowitz, 2002). This implies that for the listed commercial
banks, combining different investment options whose returns are not perfectly
positively correlated, MPT seeks to reduce the total variance of the portfolio return
while assuming that investors are rational and markets are efficient. Mathematically,
the MPT formulates the concept of diversification in investing with the aim of
selecting investment having collectively lower risks than any individual product. With
regards to portfolio diversifications, the MPT aids the listed banks in describing
investment options in terms of the inherent risks and expected returns, determining
the allocation of resources among classes of investments, reconciling risks and returns
and measuring performance.
9
2.2.2 Agency Theory
The Agency Theory (AT) was developed by Meckling,William and Jensen,in 1976.
The theory later extended to finance and managerial accounting realms to determine
the optimal amount of risk-sharing, optimal-incentive contracting and establishing
accounting control mechanisms to monitor behaviours and actions. The Agency
Theory primarily relates to situations in which one person (the agent) is engaged by
another person (the principal) to act on his/her behalf. In this case, the listed
commercial banks charged with the managerial responsibility take investment
decisions and actions on behalf of the shareholders. Both the agents and the principal
are utility maximizers motivated by pecuniary and non pecuniary items that cause
incentive problems under conditions of uncertainty and information asymmetry.
When the principal is well informed about the actions of the agent, then it becomes
more possible to curb agent opportunism and thus the agent is bound to act and
behave in the interests of the principal. The agency model explains the central
problems in hierarchical interactions between managers and investors in policy
implementation and policy-making concerns. It also concerns problems that arise
when the stakeholders of the listed banks have conflicting views and when both the
agents and the principal have different attitudes and preferences towards risk and
returns.
2.2.3 Diversification Strategy Model
Diversification is a marketing strategy that was developed in 1957 and is part of the
Igor Ansoff’s product matrix as one of the four growth strategies. Market penetration
is where the company markets its existing products in its current market, product
development where the company develops a new product in its existing market and
market development where the company sells its existing products in a new market.
Diversification is the last of the four marketing strategies and also the one with the
most risk because it involves a company entering into a new market whilst creating a
new product. Diversification strategy can be pursued to enhance a firm’s growth when
the other three strategies fail to produce desired objectives (Hussain, Khattak, Rizwan,
& Latif, 2013). It is important to differentiate between diversification strategies and
types of diversification. The former could include licensing of new technologies, firm
acquisition, developing new products internally, and forming alliances. According to
Pearce, Robinson and Mital, (2008) a company can decide to pursue one of four types
10
of diversification including: vertical diversification; horizontal diversification;
concentric diversification and conglomerate diversification.
A firm diversifies vertically when it moves forward or goes backwards to the previous
stages of its production cycle by either producing its own raw materials or distributing
its final product. Vertical diversification enables a firm to minimize risk by reducing
the risk about access to market for the final products or raw materials. Horizontal
diversification occurs when a firm produces new products that targeting their current
customers. Horizontal diversification enables a firm to increase its output faster and
also make use of their existing employee’s skills without having the need for new
expertise (Hussain, et al., 2013). Under conglomerate diversification, a firm produces
new products in order to make use of the existing technologies and marketing system
and hence enlarging the production portfolio of the firm. As a result of the close
relationship between the new and existing business the firm will be more profitable,
smooth and synergistic in the expansion. Conglomerate diversification occurs when a
firm produces products that do not utilize the current technologies or distribution
channels and that do not have any commercial relation to the existing products. This
kind of diversification exposes the firm to new opportunities and increases its revenue
by providing new profitable investment channels (Pearce, Robinson and Mital, 2008).
2.3 Empirical Review
This part entails the review of literature in empirical studies conducted by various
scholars on areas relating to bancassurance, mobile banking, real estate finance,
medium enterprise financing and Financial Performance of Listed Commercial Banks.
2.3.1 Bancassurance and Financial Performance
Banccasurance basically means selling both banking and insurance services by the
same corporate entity. Acording to Waweru (2014), it is the process by which an
insurance company uses the bank network to sell its policies and products using the
bank’s networks to reach a wider customer base. It is beneficial to both the bank
offering its channel and the insurance company providing the services as the bank
earns risk-free (fee-based) income while the insurance company increases its capacity
to reach out to a wider customer base. Sorina, (2012) views banccasurance as a
strategy that enables insurance companies and banks to operate in the financial market
11
in an integrated manner. It was initially started in Europe in 1980s and spread rapidly
to the rest of the world.
According to Brophy, (2012) the term ‘banccasurance was first discovered in Europe
where it was linked to the growth of mortgage and consumer credit as well as the
liberalization of financial markets. Considering the development of Bancassurance in
Europe, Sorina (2012) notes that the highest market shares in non-life insurance sector
in Europe were: Turkey (9.7%), Portugal (9.3%), the UK (9.9%), France (9.0%)
Netherlands (8%) and Spain (7.9%). The first bank to venture into banccasurance was
Barclays bank in 1965 when it launched Barclays Life. From Europe, bancassurance
has developed and has penetrated other financial markets including the United States
of America, India, Japan, South Korea and Africa where it has significantly
penetrated the Nigerian financial market and other African countries (Mwara, &
Okello, 2016). In Kenya the Central Bank introduced bancassurance policies as a way
to monitor the recent spread in the Kenyan banks. Banks are tapping into the
insurance market as a way to diversify their products to be able to keep up with the
hardening competition. Many listed commercial banks have also ventured into
bancassurance over the last few years. Studies have been done relating the adoption
of bancassurance with financial performance, profitability, market share and
competitiveness (Peng, Jeng & Wang, 2015; Arora & Jain, 2013; Brophy, 2013;
Sorina, 2012; and Waweru, 2014).
Peng, Jeng, Wang & Chen (2015) conducted a study on how bancassurance affects
the efficiency and profitability of banks in Taiwan. Then study was guided by two
specific objectives: 1. To examine the effect of invelvement in bancassurance on bank
performance and 2. To determine the effect of cooperative diversification strategy in
bancassurance business on bank performance. The study used actual data provided by
a unique database on engaging in bancassurance business between 2004 and 2012.
The study relied on 2004-2012 panel dataset obtained from the Taiwan Insurance
Institute to facilitate the empirical analysis of the relationship between bancassurance
and bank performance in terms of efficiency and profitability. The results showed an
increase in commission income, non-interest income and shareholders’ value. The
findings of the study also revealed that banks with greater involvement in
bancassurance accrue larger risk-adjusted returns with such involvement leading to
improved efficiency and increased shareholders’ value. It therefore recommended that
12
banks should employ a diversification strategy rather than a concentration strategy
because it promotes banks profitability and hence better financial performance.
A study by Arora & Jain (2013) set to analyze the influence of bancassurance on the
Bank of India and the motivation behind adoption of bancassurance by banks. The
study sought to analyze the conntributions of bancassurance on the financial
performance of Bank of India hitting upon the reasons for changes in the financial
performance of the Bank of India. The study relied on secondary data obtained from
the annual reports of the bank of India and all relevant data pertaining to the bank’s
history, growth and development mainly collected from books, magazines, reports,
bulletins, papers and research reports published by the bank. The study only involved
the Bank of India in the Indian banking industry and examined the bank’s financial
performance four years before and four years after adoption of bancassurance. In
addition, the study used the CAMEL (Capital Adequacy, Management Performance,
Earnings performance, Liquidity) model to measure the financial performance of the
bank over the period of interest.
The study established a favourable impact of bancassurance on the financial
performance of bank of India and that the bank also contributed to the overall
performance of the insurance company whose products are sold through the bank. It
also found that the need to keep up with the hardening competition has been the major
motivation behind bancassurance. The study indicated that bancassurannce is among
the important factors that contribute to beter performance of the bank. From the
analysis of the bank’s profitability, income, earnings per share, returns on assets and
other financial ratios, bancassurance has also been seen to affect the banks
performance in a positive way as it has enhanced the growth of banks. The study
revealed an increase in fee-based income from the banks’ adoption of the
bancassurance products. The total incomes, net profit, return on investment, earnings
per share, and capital adequacy ratio indicated higher performance. The study
findings revealed that beside other important factors, the adoption of bancassurance
enhanced the financial performance of the bank.
In addition, Waweru (2013) studied the effect of bancassurance on the financial
performance of commercial banks in Kenya. The study sought to determine how the
adoption of bancassurance influences the performance of commercial banks. The
13
study relying on a descriptive research design used secondary data from banks
offering bancassurance as a product. The said data was obtained from the Central
Bank of Kenya reports for a five-year period from 2009 to 2013. The study data was
analyzed using SPSS. The study revealed that banks experience better financial
performance as a result of bancassurance. The study findings showed a positive
correlation between bancasurance and financial performance of commercial banks in
Kenya suggesting that bancassurance positively affects the financial performance of
financial performance of commercial banks in Kenya. It also established that the
annual interest on loan advances increased as a result of bancassurance. It further
recommended top management commitment and support in facilitating the
adoptionand implementation of bancassurance to enhance the bank’s financial
performance.
Peng, et al. (2015) addressed the efficiency and profitability of banks as a result of
employing a bancassurance strategy. The study noted that the bank experienced
benefits of gaining faith by the customers’, employees of the bank gained technical
knowhow, and increased profitability by the bank. There’s need to conduct similar
studies in a local setting to identify whether bancassurance as a diversification
strategy leads to better corporate performance. The study by Waweru (2013) aught to
have focused only on the combined effect of bancassurance, incomes from loans and
inflation influence the financial performance of the commercial banks in Kenya. They
did not consider non-traditional aspects of performance like learning and growth,
business and customer. There’s therefore need to study how diversification strategy
affects other aspects of competitive performance like unmatched customer
satisfaction, learning and growth as well as its effect on the business perspective
which are all critical to success of an organization.
2.3.2 Mobile Banking
Kathuo, Rotich and Anyango (2015) define mobile banking as the use of electronic
mobile devices such as mobile phones to access banking services and facilities.
Mobile banking is a service offered by the bank that uses mobile telecommunication
networks as a platform to perform traditional banking such as transferring money,
checking account balance, making payments and transferring money between
accounts. Commercial banks play important roles in financial intermediation and in
the advancement of economic growth and development of every country. Changes in
14
the business environment have necessitated changes in operations and performance of
commercial banks and other financial institutions. For instance, advances in ICT have
influenced business activities and brought about a paradigm shift on the banking
industry performance. Such changes have necessitated the need for efficiency and
effectiveness in running of the commercial banks. To stay abreast with the dynamic
market demands and the global development standards in the banking sector, improve
the quality of customer value, and reduce transaction costs, commercial banks
adopted technological innovations and thus invested heavily in Information
Communication Technology (ICT).
In particular, mobile banking is one of the prime areas in which commercial banks
have invested in considering it a catalyst for improved productivity, market
penetration, increasing financial inclusion as well as enhancing business growth and
development. The quest to compete effectively in the financial industry has seen
banks take advantage of mobile money transfer services as a convenient and cheap
way to transfer money. Mobile money having started in a 3rd
world country,
Philippines, majority of the developing countries where most people are unbanked
while a considerable population own mobile phones have adopted it. According to a
report by USAID (2011), among the developing countries adopting mobile money
transfer systems, Kenya is the global leader of Mobile banking since the launch of
Safaricom’s M-pesa in March 2007. The success of M-Pesa gave birth to M-shwari
(Commercial Bank of Africa), M-Kesho, PesaPap(Family Bank), Pata Cash(Kenya
Post Office savings Bank), KCB Connect (Kenya Commercial Bank) and Equitel
(Equity Bank). A number of studies have been done to determine the relationship
between mobile money and bank performance.
According to Mwara and Okello (2016) mobile banking started in the Philippines in
2000 with the introduction of Smart Money which was an electronic cash card
connected to a mobile phone by a mobile operator and which was the first of its kind
in the world. The study assessed the use of banncassurance and electronic money
transfersn as diversification strategy in enhancing competitive performance at Equity
Bank, Kenya. The study relied on a descriptive research design with a survey method
targeting branch managers, corporate managers and divisional managers in charge of
bancassurance, electronic money transfer and agency banking atEuity Bank, Kenya.
structured questionnaires were used to collect the require data which was then
15
analyzed using SPSS. In addition, both regression analysis and correlation analysis
were done to guide inferences on the relationships between the study variables.The
study revealed that the adoption of bancassurance was important but did not
significantly influence financial performance of the bank. However,the study
recommended the innovative adoption of bancassurance and electronic money
transfers to enhance financial performance of the bank.
A study done by Monyoncho (2015) on the relationship between banking
technologies and financial performance of commercial banks in Kenya. The study
sought to determine the relationship between e-banking technologies and financial
performance of commercial banks in Kenya. In particular, the specific objectives of
the study were to assess the influence of ATMs on financial performance of
commercial banks, to establish the effect of debit and credit cards on the financial
performance of commercial banks in Kenya and to assess the effect of internet
banking on the financial performance of of commercial banks in Kenya. The study
drawing from technology acceptance model, diffusion of innovations theory and
resource based theory used secondary data from the financial statements of 44
commercial banks in Kenya for five year period. SPSS version was used for data
analysis and pearson moment correlation and regression analysis was conducted to
determine the nature of the relationship. The study revealed that mobile banking
impacts the profitability of commercial banks as it offers the convenience of
undertaking bank transactions remotely. The study further found a strong positive
correlation between the adoption of mobile banking and financial performance of
commercial banks in Kenya implying that increased usage of mobile banking
increases the financial performance of commercial banks. The study recommended
that commercial banks should continue investing in ICT in order to boost their
performance.
Bwisa and Wanyonyi (2013) studied the influence of mobile money transfer services
on the performance of micro enterprises in Kitale Municipality. The strudy was donne
with a specific objective seeking to determine the effect of various forms of mobile
money transfers on the performance of micro enterprises in order to enhance the
performance of micro enterprises. Thje sudy was based on a survey of 36 micro
enterprises from agricultural, service and processing sectors all of which were
considered to have existed for over 5 years. The study engaged enterprises that have
16
had business experience with and without the use of mobile money transfer services
over the period. In addition, the study used chi-square test to establish the relationship
between the use of mobile money transfer and business performance and established
that improved performance of the micro enterprises is due to the use of mobile money
transfer for debt collection, business to business (B2B) transactions, customer to
business (C2B) transactions.
Kathuo, Rotich, & Anyango (2015) also studied the influence of adoption of mobile
banking technology on financial performance of commercial banks in Kenya using
return on assets and return on equity as the main financial performance indicators and
revealed an increase in the number of mobile banking transaction. The study
concluded that banks that have already adopted mobile banking have largely
increased their customer outreach and hence improved their financial performance
and banking efficiency. In a nutshell, the said studies examined the correlation
between mobile banking adoption and financial performance of commercial banks.
For instance, Mwara and Okello (2016) studied the adoption of electronic funds
transfer as a diversification strategy on competitive performance of Equity bank while
Monyoncho (2015) studied the relationship between mobile technologies and
financial performance. Bwisa and Wanyonyi (2013) on then other hand studied the
influence of mobile money transfers on financial performance of commercial banks.
None of the studies focused on commercial banks listed on Nairobi Securities
Exchange. In addition, none of the mentioned studies compared the financial
performance of the banks before and after the adoption of mobile banking in their
product portfolios. In contrast, this study will consider the influence of mobile
banking adoption on financial performance of listed commercial banks.
2.3.3 Real Estate Finance
The demand for housing world over has increased tremendously considering the
population explosion and migrations in various parts of the world. However, it is
noteworthy that the cost of housing has also increased significantly and thus the need
for real estate financing. As such, many financial institutions have adopted real estate
financing as a diversification strategy to enhance their performance, meet the market
demands and above all to stay abreast with the dynamic market and competitive
forces. Real estate financing refers to the provision of finance or capital for housing
purchase, for building, construction of housing, or the resources requisite for
17
acquiring or accessing housing projects by household or credit offered against some
collateral (Ojiambo, 2014). Institutions that provide credit for real estate financing
include commercial banks, mortgage finance companies, savings and loans co-
operatives, insurance companies, government parastatals, pension funds, trusts, and
other real estate entities. A number of studies have been conducted to establish the
relationship between real estate finance and financial performance of financial
institutions (Mutega, 2015; Ojiambo, 2014; Ongore, & Kusa, 2013; Yan, Talavera, &
Fahretdinova, 2016).
Dirnhofer (2012) examined the influence of mortgage backed securities influenced the
performance of top 35 banks in the USA during the 2007 financial crisis. In particular,
the study sought to unearth how the performance of banks that were engaged in
mortgage financing were impacted by the financial crisis that took place in the U.S
market. The analysis involved a regression conducted with two different dependent
variables to depend how the bank performance depends on several factors which
reportedly caused the financial turmoil. The findings of the study revealed that
mortgage backed securities have proven how financial instruments can have a large
impact on the entire financial market. It also emerged that during the financial
turmoil, hundreds of the banks used the mortgage backed securities to enhance their
growth. However, it is noteworthy that despite the rationale of the study, its findings
only applied to the U.S and cannot be generalized to relate to the listed banks in
Kenya.
Bello and Adewusi (2009) did a comparative study analyzing the performance of real
estate and financial assets as security for mortgage lending in Nigeria with a view to
ascertain whether or not the drift towards financial assets is justified. The study
sought to assess the performance of real estate and financial assets used as a security
for loans and used a sample of 46 transactions from selected banks in Lagos. The
study involved landed and financial assets to test the difference between two
population means and revealed that though the banks still prefer financial assets, both
real estate and financial assets provided cover for the secured loans. Moreover, the
study revealed that real estate portfolio yields superior performance in the long run
and exhibited higher growth compared to financial assets over the entire loan period.
It is in this basis that the study discovered that most of the sampled banks preferred
financial assets as security than real estates yet the results of the hypotheses testing
18
indicated that both assets proved adequate but real estate appreciated steadily over the
period yielding better financial performance.
In Kenya, a study by Rop, Kibet, and Bokongo (2016) on the effect of investment
diversification on financial performance of commercial banks in Kenya using an
exploratory research design. The specific objectives of the study were to: investigate
the effect of insurance investment on financial performance of commercial banks in
Kenya, establish the effect of government securities on financial persformance of
commercial banks in Kenya, determine the effect of real estate investment on the
financial performance of comercial banks in Kenya and to establish the effect of
buying shares on the financial performance of commercial banks in Kenya. A
population of 40 commercial banks and a sample of 40 operational commercial banks
in Kenya and used secondary data collected using data collection sheets.The data was
then analyzed using explanatory annd inferential statistics with the help of SPSS
version 20. The findings indicate that previous studies on the consequences of real
estate investment by establishments in the United States of America show a low
correlation between returns on real estate and non-real estate assets and concluded
that a significant relationship exists between real estate investment and financial
performance of banks. The study thus highly recommended the adoption of portfolio
diversification for enhancement of bank performance. However, considering the
scope of the study, it involves the U.S establishments in a more developed banking
industry which operate in a different business environment. It therefore follows that
the observations made in the study may not be peculiar to the Kenyan scenario.
A study done by Ojiambo (2014) on the effect of real estate finance on the financial
performance of commercial banks listed on the Nairobi Securities Exchange in Kenya
using data from annual reports of 11 commercial banks for a five-year period. The
study adopted a descriptive research design and used secondary data sourced from the
annual reports that are available from the individual banks websites, the NSE and the
CBK website. The data used for the study related to a five year period from 2009 to
2013. The study further used descriptive statistics and inferential statistics to
establish the relationship between the study variables. It established that real estate
finance influences the financial performance of listed commercial banks, noting that
mortgage finance had a strong effect on financial performance. The study further
indicated that mortgage finance failed to improve the financial performance of
19
commercial banks and thus suggested that the necessity to diversify the banks’
product portfolio to enhance financial performance. However, the study revealed that
the commercial real estate market being dominated by institutional investors it
operates in a cyclical industry and is affected by changes in local and national
economic conditions such as consumer demand, employment rates, the level of
economic activity and household formation among other factors.
On the contrary, a study by Odhiambo (2015) sought to investigate the effect of Real
Estate Finance on the Financial Performance of listed commercial banks in Kenya
using secondary data from the banks’ annual reports for the period 2009-2013 from
nine listed commercial banks. The financial data from the banks were analyzed using
descriptive statistics where a panel regression analysis was conducted. The findings of
the study showed that real estate finance did not have a significant effect on the
financial performance of listed commercial banks. As a result, the study
recommended that all stakeholders in the housing industry should consider strategies
that improve the uptake of affordable mortgage loans in order to improve the overall
performance of banks. The study, however, never looked at other correlates of
financial performance in the banks’ lending portfolio. The present study stands out as
it examines the influence of real estate finance as part of a diversified portfolio on
financial performance of listed commercial banks.
2.3.4 Financial Performance
Financial performance is considered as the degree to which a business can utilize its
assets to realize increased revenues and turnovers. It is the ability of an entity to
operate profitably, efficiently and effectively, withstand environmental threats,
exploting the available opportunities and the ability to grow (Mutega, 2015). The
level of an entity’s financial performance determines its overall financial health and
shows whether it is profitable or not. Various techniques used to measure financial
performance exist depending on the aspect of performance that one is interested in
some of the indicators of financial performance include ratios that explain the level of
growth of revenue, profitability, return on assets and return on capital. Various studies
have thus approached this concept differently.
Alkhatib and Harsheh (2012) examined the financial performance of 5 Palestinian
Commercial banks listed on Palestine Securities Exchange (PEX). Tnhe study sought
20
to address the hypothesis that there exists an insignificant impact of size, credit risk,
asset management and operational efficiency on financial performance of Palestinian
commercial banks. The study sampled 5 Palestinian commercial banks listed on PEX
and used annual time series data extracted from the banks’ financial reports for the
period 2005-2010. In addition, the study measured financial performance using three
indicators; Internal-based performance measured by Return on Assets, Market-based
performance measured by Tobin’s Q model and Economic-based performance
measured by the economic value added. The findings of the study revealed that there
exists statistically significant impact of bank size, credit risk, operational efficiency
and asset management on financial performance of Palestinian commercial banks.
The results, however, never looked at whether the bank’s portfolio was diversified or
not and as such, its findings may not apply to commercial banks with diversified
product portfolios.
Islam (2014) analyzed the financial performance of National Bank Limited in
Bangladesh for the period 2008-2013 using financial ratios. Among the financial
ratios that the study used include Net loans to asset ratio, loan to deposit ratio, asset
credit quality ratio, and return on assets. The study relied on a descriptive research
design and obtained secondary data from annual reports, brotures, mannuals and
publications of the National Bannk Ltd as detailed on the bank’s website. A financial
ratio analysis was done and the results of the study indicated that despite he
unfavourable economic conditions of last few years, the bank achieved exceptional
performance in all of its core banking operations. It also revaled that the performance
of banks depends on the management’s ability to formulate strategic plans and
efficient implementation of its strategies and policies that seek to improve their
performance. Ongore and Kusa (2013) observe that every strategy undertaken by the
commercial banks seeks to achieve this particular objective. In this study, though, the
main area of interest insofar as financial performance of commercial banks is
concerned remains the profitability attained by the banks. The main indicators of
financial performance to be studied in this case include Return on Asset (ROA),
Return on Equity (ROE), Net Interest Margin (NIM) and Profitability.
According to Ojiambo (2014) ROA is a ratio of a bank’s income to its assets that
shows how efficiently the organization’s resources are utilized to generate income.
This ratio indicates the level of efficiency of a bank in generating revenues from all
21
the resources at its disposal. On the other hand ROE explains the amount of profit
earned by an organization in relation to the firm’s value of equity. The ROE is
computed as a ratio of an organization’s net income to the total equity capital while
NIM measures the difference between the interest income generated by an
organization and the amount of interest paid out to the organization’s lenders relative
to their asset value (Khrawish, 2011). The NIM is computed as a percentage of
interest earned on loans and other assets minus interest paid on debt divided by the
average value of assets on which the income is earned over a specified period.
2.4 Conceptual Framework
The independent variable will be conceptualized in terms of bancassurance,mobile
banking and real estate finance. In particular bancasurance will be studied in terms of
life insurance, general insurance and investment plans while mobile banking will be
studied considering the value of mobile money transfers, mobile credit advances and
mobile payments. Besides, real estate finance will be conceptualized in terms of fixed
asset finance, conntruction finance and mortgage finance. On the other hand, the
study will seek to measure the financial performance in terms of profitability, returns
on assets, returns on equity, earnings per share and liquidity. As such, the conceptual
framework of the study will be as follows:
Independent Variables Dependent Variable
Figure 2. 1: Conceptual Framework
Bancassurance
- Life Insurance
- General Insurance
- Investment Plans
Mobile Banking
- Mobile Money Transfers
- Mobile credit
- Mobile payments
Real Estate Finance
‒ Fixed asset finance
‒ Construction finance
‒ Mortgage finance
Financial Performance
‒ Profitability
‒ Returns on Assets
‒ Return on Equity
‒ Earnings per share
22
Figure 2.1 shows the conceptual framework adopted in this study. The independent
variables was studied in terms of bancassurance, mobile banking, and real estate
financing while financial performance is construed as the dependent variable.
2.5 Summary of Reviewed Literature
This study sought to assess the influence of portfolio diversification on financial
performance of listed commercial banks in Kenya. The study was based on three
theories namely, Modern Portfolio Theory, Agency Theory, Diversification strategy
model. In this chapter, an elaborate review of the existing literature on product
diversification and financial performance of listed commercial banks is done. With
regards to product diversification, variables including bancassurance, mobile banking
and real estate finance are detailed based on empirical evidence from studies
conducted by other scholars and further conceptualized in relation to their influence
on the banks’ financial performance.
The global banking industry and financial sectors have experienced turbulent market
conditions, market deregulation, stiff competition, technological advancements and
reduced trade barriers thereby necessitating banking product diversification. As such,
many commercial banks have resorted to diversifying their portfolios in order to stay
afloat and maintain or enhance their profitability. Nonetheless, bank performance still
remains to be an issue of concern since, lately, not all the banks have maintained or
significantly improved their performances (Otieno, & Moronge, 2014). Whereas a
number of studies have been conducted in developed economies on the influence of
product diversification on bank performance, scanty empirical evidence exists on the
developing economies like Kenya. However, there is evidence to the effect that the
Banking sector in Kenya has experienced insignificant growth and unstable financial
performance. For example, the aggregate financial performance of the banking sector
in Kenya has been recorded below the industry estimates since in less than a year,
some banks have registered poor performance, three banks have been put under
receivership and others acquired.
2.6 Research Gaps
Diversification is a portfolio strategy that is designed and pursued in the banking
industry to cut down on risk, increase bank revenues, reduce volatility of profits and
enhance the overall bank performance by combining various investments, assets or
23
products. According to Rop, Kibet and Bokongo (2016) banks enhance their financial
performances by diversifying their incomes from both interest income and non-
interest income in their portfolios. Every bank seeks to enhance their financial
performance by diversifying their incomes from both interest financial gains and non-
interest income in their respective portfolios. The non-interest income elements that
are often considered for portfolio diversification include share trading financial gains,
Bancassurance income, dividend financial gains, commercialism activities gains, and
fees as well as commissions on banking products other than loan-related interest
charges.
Peng, et al. (2015) addressed the efficiency and profitability of banks as a result of
employing a bancassurance strategy. There’s a knowledge gap hence the need to
conduct similar studies in a local setting to identify whether bancassurance as a
diversification strategy leads to better corporate performance. There’s also the need to
study how diversification strategy affects other aspects of competitive performance
like unmatched customer satisfaction, learning and growth as well as its effect on the
business perspective which are all critical to success of an organization. Mwara and
Okello (2016) studied the adoption of electronic funds transfer as a diversification
strategy on competitive performance of Equity bank while Monyoncho (2015) studied
the relationship between mobile technologies and financial performance. Bwisa and
Wanyonyi (2013) on then other hand studied the influence of mobile money transfers
on financial performance of commercial banks. None of the studies focused on
commercial banks listed on NSE. In addition, none of the mentioned studies
compared the financial performance of the banks before and after the adoption of
mobile banking in their product portfolios. In contrast, this study will consider the
influence of mobile banking adoption on financial performance of listed commercial
banks.
Another study by Odhiambo (2015) sought to investigate the effect of Real Estate
Finance on the Financial Performance of listed commercial banks in Kenya using data
for the period 2009-2013 from nine listed commercial banks. The findings of the
study showed that real estate finance did not have a significant effect on the financial
performance of listed commercial banks. As a result, the study recommended that all
stakeholders in the housing industry should consider strategies that improve the
uptake of affordable mortgage loans in order to improve the overall performance of
24
banks. The study, however, never looked at other correlates of financial performance
in the banks’ lending portfolio. The present study stands out as it examines the
influence of real estate finance as part of a diversified portfolio on financial
performance of listed commercial banks.
25
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
A research methodology is a procedure by which researchers go about their work of
describing, explaining and predicting phenomena (Rajasekar, Philominathan &
Chinnathambi, 2013). This chapter provides a road map on how the objectives of the
study will be achieved. It covers the research design, target population, research
instruments, pilot-testing, data collection and data analysis procedure to be used.
3.2 Research Design
According to Kombo & Tromp (2006), a research design is a systematic structure that
outlines the methodology and procedure for conducting a study on a given topic. To
address the research problem identified in chapter one, the study used a descriptive
research design to study the influence of product diversification on the financial
performance of listed commercial banks in Kenya. The descriptive design permits the
study of the relationships between the variables. The design was considered ideal for
this study as it enabled the researcher to explain the changes in financial performance
of the listed commercial banks as a result of diversifying their product portfolios with
products related to bancassurance, mobile banking and real estate finance.
3.3 Target Population
The target population of the study comprised of all the 11 listed commercial banks.
Specifically, the study targeted 5 section heads/portfolio managers in each of the
banks who will make a total of 55 respondents. Since the population is fairly small, a
census design was employed. The study relied on both primary data from
management staff and secondary data from the financial reports of each of the
commercial banks listed on NSE.
3.4 Data Collection Instruments
The researcher used structured questionnaires and data collection sheets to collect
data from the financial reports of the listed commercial banks as well as NSE.
Important secondary data was also be extracted from the Central Bank of Kenya
(CBK) to aid in the accomplishment of the specific study objectives.
26
3.5 Pilot Testing
A Pilot test is a study done in preparation for the main study. As Welman & Kruger
(1999) note, the pilot study is important in detecting possible errors in the
measurement procedures, identification of unclear questions in the questionnaire and
determining the validity and reliability of the data to be collected. In this study,
employees from Faulu Bank, Nakuru was used for the pilot test. SPSS was used to
analyze the pilot data to determine the validity and reliability of the research
questionnaire (Kothari, 2004).
3.5.1 Validity of Research Instrument
According to Golafshani (2003) validity is concerned with whether the research
measures what it is intended to measure or rather how true the research findings are.
Robson (2002) identifies some unsystematic threats to reliability which include
unforeseen happening before or during data collection, participants’ refusal to
cooperate and change of behavior of the participants. To guarantee validity, the
researcher conducted both face validity and content validity tests on the instrument to
ensure the objectives are clearly defined to operationalize the study expectation.
3.5.2 Reliability of Research Instrument
Reliability refers to the degree at which a researcher’s data is free from error and
hence yields consistent findings (Saunders et al, 2009). The data should be consistent
over time to be an accurate representation of the population under study. Robson
(2002) identifies five sources of unsystematic threats to reliability: factors due to
interviewer error, unfavorable conditions under which measurements are made factors
caused by the research subject, instrument reliability and data processing reliability.
However, the researcher did a pilot study to test the extent to which the instrument
can be relied upon. In this study, the researcher carried out the pilot study at Faulu
Bank, Nakuru and Cronbach alpha (α) with a reliability threshold (α ≥ 0.7) will
deemed fit and acceptable. The reliability results are shown in Table 3.1.
Table 3.1: Reliability Test
Study Variables Number of Test Cronbach Alpha Values
Bancassurance 7 0.706
Mobile Banking 6 0.754
Real Estate Finance 5 0.770
Financial Performance 5 0.770
27
The reliability test shown in Table 3.1 produced Cronbach alpha (α) values of greater
than 0.70, making the questionnaires largely reliable.
3.6 Data Collection Procedure
The researcher obtained a research permit from the National Council of Science,
Technology and Innovation (NACOSTI) to conduct the study. The researcher then
self-administered the questionnaires to the respondents and obtain the requisite
secondary data using the data collection sheets from the banks’ financial reports.
3.7 Data Processing and Analysis
After the required data is collected, the returned questionnaires was cleaned, coded
properly and subjected to thorough scrutiny to ensure completeness. The data was
analyzed using both descriptive and inferential statistics to determine the relationship
between product diversification and financial performance of the listed commercial
banks. The researcher used SPSS to analyze the collected data. Descriptive statistical
measures such as percentages, means and standard deviation was used to interpret the
study findings. In addition, the researcher ran a linear regression analysis and a
Pearson Correlation analysis to show the relationship between the study variables.
Besides the descriptive interpretation, the researcher used tables to present the
findings of the study. In addition, the researcher relied on ANOVA to test the
hypotheses and the coefficient of correlation was used to validate the research
hypotheses. The following regression equation was used to determine the influence of
portfolio diversification on the financial performance of the listed commercial banks:
Y = β0+ β1X1 + β2X2 + β3X3 + ȇ
Where: Y = Financial Performance
βi = Coefficients to be estimated
X1 = Bacassurance
X2 = Mobile Banking
X3 = Real Estate Finance
ȇ = Error term
28
CHAPTER FOUR
RESEARCH FINDINGS AND DISCUSSIONS
4.1 Introduction
The chapter provides an analysis of the collected data, interpretation and discussion of
the findings. Following the processing and analyzing of the collected data, the
findings are presented and discussed in this chapter and are in line with the objectives
of the study. The responses on all the variables are on a 5-point scale while the
statements in the view of the same are on a Likert scale. In the 5-point scale 1, 2, 3, 4
and 5 represent strongly disagree, disagree, neutral, agree, and strongly agree
respectively. Analysis using secondary data is also analyzed. The chapter also
provides the regression analysis carried out. Finally the chapter provides a model
summary and inferences drawn from the model.
4.2 Response Rate
The researcher issued 55 questionnaires to the respondents across all the targeted
banks in Nairobi, Kenya. In each bank, the researcher sought and worked with contact
persons to enable easier issuance and clarification on the issues that were unclear. Out
of 55 questionnaires that were issued to the sampled respondents, 46 of them were
filled and returned. Of the returned questionnaires, 3 were incorrectly filled and thus
were not used in the final analysis. Therefore, 43 questionnaires were correctly filled
and hence were used for analysis representing a response rate of 78.18%. According
to Curtin (2000), getting a high response rate (>75%) from a small, random sample is
considered preferable to a low response rate from a large sample. Thus the higher
response rate is preferable because the missing data is not random and thus is an
important element in proving the statistical significance of the responses.
4.3 Respondents’ Profile
The profile of respondents identifies the main information about the employees who
participated in the research process depending on the relevance of the information
sought.
The researcher sought to find out the distribution of the respondents according to their
gender, age bracket, education level, working experience and experience in portfolio
management. The aim was to deduce any trend from the respondent’s profile that was
directly linked to the variables of the study.
29
4.3.1 Gender Distribution of the Respondents
The study sought to establish the gender of the respondents with an aim of
establishing whether there was a link between gender and the variables under study.
Table 4.1 shows the distribution of the respondents according to their gender.
Table 4.1: Distribution of Respondents by Gender
Frequency Percent
Male 32 74.4
Female 11 25.6
Total 43 100.0
According to the findings, majority of employees are male (74.4%) while female were
25.6%. The researcher deduced that most portfolio managers are male and attributed
the trend to the existing gender gap in employment in most sectors in Kenya today.
4.3.2 Distribution of Respondents by Age Group
The study further wanted to establish the distribution of ages of the employees since
previous studies have linked age to various performance measures. Table 4.2 shows
the distribution of the respondents according to their ages.
Table 4.2: Distribution of Respondents by Age
Frequency Percent
31 – 40 Years 4 9.3
41 – 50 Years 29 67.4
51 Years and above 10 23.3
Total 43 100.0
The findings in Table 4.2 indicate that a majority of portfolio managers in most banks
are of the age group 41 – 50 years (67.4%) while the least age group was between 31-
40 years (9.3%). The researcher attributed this trend to the nature of progression of
employees in the banks where management positions are often filled by those who
have progressed through the ranks which would always take longer periods to
achieve.
30
4.3.3 Distribution of Respondents by Attained Educational Level
The study further sought to establish the educational levels of the respondents in order
to ascertain if it influenced the variables under study. Table 4.3 shows the distribution
of the respondents according to their attained educational levels.
Table 4.3: Distribution of Respondents by Educational Level
Educational Level Frequency Percent
Degree 21 48.8
Masters and Above 22 51.2
Total 43 100.0
From Table 4.3, the study established that 51.2% of the respondents had a master
degree or above level of education which was attributed to the higher entry
qualification levels in the banking sector in Kenya. Further, all the respondents had at
least an undergraduate degree further indicating higher educational requirements
needed to join the banking sector.
4.3.4 Working Experience of the Respondents
The researcher further wanted to establish the working experience of the respondents.
This was important since previous studies indicated positive relationship between
experience of employees and their performance which in turn would often enhance
financial performance. The findings of working experience are shown in Table 4.4.
Table 4.4: Distribution of Respondents According to Working Experience
Frequency Percent
5 - 10 years 5 11.6
10 -15 years 23 53.5
above 15 years 15 34.9
Total 43 100.0
According to the findings, majority of the respondents (53.5%) had worked for
between 10 to 15 years in their respective banks. Cumulatively, more than 88.4% had
more than 10 years of experience while only 11.6% had less than 10 years of working
experience. This trend was attributed to the fact that most bank employees are
31
employed on a permanent and pensionable basis and thus they would most likely have
risen through the ranks over some period of time which translates to higher work
experience and longer duration in their respective banks. Further, the longer
experience implied that most employees clearly know the workings of their banks and
thus their responses would be valid and relevant.
4.3.5 Portfolio Experience of the Respondents
The researcher further wanted to establish the working experience of the respondents.
This was important since portfolio management is the core subject area of the study.
The findings of working experience are shown in Table 4.5.
Table 4.5: Distribution of Respondents According to Portfolio Experience
Frequency Percent
0 - 5 years 1 2.3
5 - 10 years 9 20.9
10 -15 years 28 65.1
above 15 years 5 11.6
Total 43 100.0
According to the findings, majority of the respondents (65.1%) had portfolio
experience of between 10 to 15 years in their respective banks. Cumulatively, more
than 76.7% had more than 10 years of experience while only 2.3% had less than 1
year of portfolio experience. The longer portfolio experience implied that most
managers clearly know the workings of their banks and thus their responses would be
valid and relevant.
4.4 Findings of the Study Variables
The researcher analyzed the influence of portfolio diversification on financial
performance of commercial banks listed on NSE, Kenya. The selected factors were
bancassurance, mobile banking and real estate finance. The dependent variable was
financial performance of banks.
32
4.4.1 Influence of Bancassurance on Financial Performance
The study sought to establish the influence of bancassurance on financial
performance. The results of the analysis on factors associated with bancassurance and
how it influences financial performance in listed commercial banks are shown in
Table 4.6.
Table 4. 6: Influence of Bancassurance on Financial Performance
n Min Max Mean Std. Dev.
Banccasurance increases the size of business, increase
economies of scale and the banks’ ability to compete
effectively within the financial industry
43 2 5 3.84 1.067
Banks are tapping into the insurance market as a way
to diversify their products to be able to keep up with
the hardening competition
43 3 5 4.14 .743
Bancassurance accrues larger risk-adjusted returns
leading to improved efficiency while increasing the
shareholders’ value
43 1 5 3.53 1.386
Banking product diversification promotes better
financial performance through increased profitability 43 1 5 3.56 1.563
Fee-based income increase due to the adoption
bancassurance products 43 1 5 3.26 1.274
Selling insurance through the bank promotes bank’s
efficiency and enhances portfolio performance 43 2 5 3.42 1.006
Selling insurance through the bank increases bank’s
commission income, non-interest income and
shareholders’ value
43 2 4 3.49 .736
Valid N (listwise) 43
From the findings, majority of the respondents agreed that banccasurance increases
the size of business, increase economies of scale and the banks’ ability to compete
effectively within the financial industry (3.84), that banks are tapping into the
insurance market as a way to diversify their products to be able to keep up with the
hardening competition (4.14), bancassurance accrues larger risk-adjusted returns
leading to improved efficiency while increasing the shareholders’ value (3.53) and
that banking product diversification promotes better financial performance through
increased profitability (3.56). However, majority of the respondents were unsure
33
when asked whether fee-based income increases due to the adoption bancassurance
products (3.26), whether selling insurance through the bank promotes bank’s
efficiency and enhances portfolio performance (3.42) and whether selling insurance
through the bank increases bank’s commission income, non-interest income and
shareholders’ value (3.49). On average the responses had a standard deviation close to
1.000 which indicated smaller dispersion from the mean. This was interpreted to mean
convergence of responses on the particular propositions.
4.4.2 Influence of Mobile Banking on Financial Performance
The study further sought to establish the influence of mobile banking on financial
performance in line with the second study objective. Table 4.7 shows the findings
related to mobile banking and financial performance.
Table 4.7: Influence of Mobile Banking on Financial Performance
n Min Max Mean
Std.
Dev.
Many customers who could otherwise be excluded
from mainstream banking, access banking services 43 1 5 3.53 .984
Increased usage of mobile banking increases the
financial performance of commercial banks 43 1 4 3.05 .950
Improved performance of the listed banks is due to the
use of mobile money transfer for debt collection,
business to business transactions and customer to
business (C2B) transactions
43 1 5 3.33 1.267
Banks that have already adopted mobile banking have
largely increased their customer outreach and hence
improved their banking efficiency 43 1 5 2.88 1.117
Frequency of transactions using Money Transfer
technologies drive more revenues to the bank and
increases profitability 43 2 5 3.19 .880
Adoption of mobile banking increases customer access
to loans and hence the bank’s interest earnings 43 2 5 3.47 .909
Valid N (listwise) 43
The respondents, on average, agreed that many customers who could otherwise be
excluded from mainstream banking, access banking services (3.53). However,
majority of the respondents were unsure when asked whether increased usage of
34
mobile banking increases the financial performance of commercial banks (3.05),
whether improved performance of the listed banks is due to the use of mobile money
transfer for debt collection, business to business transactions and customer to business
(C2B) transactions (3.33), whether banks that have already adopted mobile banking
have largely increased their customer outreach and hence improved their banking
efficiency (2.88), whether frequency of transactions using money transfer
technologies drive more revenues to the bank and increases profitability (3.19) and
whether adoption of mobile banking increases customer access to loans and hence the
bank’s interest earnings (3.47). On average the responses had a standard deviation
close to 1.000 which indicated smaller dispersion from the mean. This was interpreted
to mean convergence of responses on the particular propositions.
4.4.3 Influence of Real Estate Finance on Financial Performance
The study then sought to establish the influence of real estate finance on financial
performance in line with the third study objective. The findings are based on a 5-point
Likert scale and are depicted in Table 4.8.
Table 4.8: Influence of Real Estate Finance on Financial Performance
n Min Max Mean
Std.
Dev.
Real estate finance provides cover for the secured
loans 43 2 5 3.86 .743
Portfolio yields superior performance in the long run
and exhibited higher growth compared to financial
assets over the entire loan period
43 2 5 3.91 .895
Mortgage finance genarates more incomes and
enhances performance 43 3 5 4.37 .655
Stakeholders in housing industry consider strategies
that improve the uptake of affordable mortgage loans
to improve the overall bank performance
43 2 5 3.84 .688
Real estate finance increases bank profitability
evidenced by increased interest incomes, proceeds
from processing fees, net profits, earnings per share
and capital adequacy
43 2 5 3.98 .740
Valid N (listwise) 43
35
The study established that most of the respondents agreed that real estate finance
provides cover for the secured loans (3.86), that portfolio yields superior performance
in the long run and exhibited higher growth compared to financial assets over the
entire loan period (3.91), that mortgage finance genarates more incomes and enhances
performance (4.37), that stakeholders in housing industry consider strategies that
improve the uptake of affordable mortgage loans to improve the overall bank
performance (3.84) and that real estate finance increases bank profitability evidenced
by increased interest incomes, proceeds from processing fees, net profits, earnings per
share and capital adequacy (3.98). On average, the responses had a standard deviation
of <1.000 which indicated smaller dispersion from the mean which was interpreted to
mean convergence of responses on the particular propositions.
4.4.4 Financial Performance
The study lastly sought to measure perceived financial performance of listed
commercial banks in Kenya. The findings are depicted in Table 4.9.
Table 4.9: Financial Performance
n Min Max Mean
Std.
Dev.
The uptake of real estate finance is high, hence it
generates more income to the banks 43 3 5 4.05 .615
Customer acquisition and the bank’s portfolio
marketability have increased 43 2 5 3.81 .588
Interest income has improved due to the increased
uptake of loans through mobile banking 43 2 5 3.28 .882
The demand for housing, mortgage and construction
financing have increased the demand for real estate
finance hence increased bank revenues and
profitability
43 2 5 3.56 .934
Returns on Equity have increased due to increased
business efficiency and profitability 43 3 5 4.30 .638
Valid N (listwise) 43
From the findings in Table 4.9, it was established that most respondents were in
agreement that the uptake of real estate finance is high, hence it generates more
income to the banks (4.05), that customer acquisition and the bank’s portfolio
36
marketability have increased (3.81), that the demand for housing, mortgage and
construction financing have increased the demand for real estate finance hence
increased bank revenues and profitability (3.56) and that returns on equity have
increased due to increased business efficiency and profitability (4.30). However the
respondents were unsure when asked whether interest income has improved due to the
increased uptake of loans through mobile banking (3.28). On average, all the
responses had a standard deviation of <1.000 which can be interpreted to imply that
the small deviations from the mean of the responses shows convergence.
4.5 Correlation Analysis
The section presents findings resulting from correlation analysis involving the
independent variables and the dependent variable. The findings are presented in Table
4.10.
Table 4. 10: Correlation Analysis for Perceived Performance
Financial
Performance
Bancassurance Mobile
Banking
Real Estate
Finance
Financial
Performance
Pearson
Correlation 1
Sig. (2-
tailed)
N 43
Bancassurance Pearson
Correlation .177 1
Sig. (2-
tailed) .256
N 43 43
Mobile
Banking
Pearson
Correlation .201 .259 1
Sig. (2-
tailed) .196 .094
N 43 43 43
Real Estate
Finance
Pearson
Correlation .640
** .349
* -.068 1
Sig. (2-
tailed) .000 .022 .665
N 43 43 43 43
**. Correlation is significant at the 0.01 level (2-tailed), *. Is significant at the 0.05 level (2-tailed).
37
From the correlation analysis, 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. It can thus be deduced that all the variables have a positive effect on
financial performance and thus if they were all aligned positively with business
processes, they would increase performance.
Further, correlation between the independent variables and return on assets (ROA)
was carried out. The findings are presented in Table 4.11. From the correlation
analysis, mobile banking (r = 0.061) had a positive and weak correlation with ROA.
These findings are similar to those of Bwisa and Wanyonyi (2013) who found similar
positive correlation However, bancassurance (r = -0.152) and real estate finance (r = -
0.086) had a negative and weak correlation with ROA. Such finding have also been
reported by Odhiambo (2015).
Table 4. 11: Correlation Analysis for ROA
ROA Bancassurance Mobile
Banking
Real Estate
Finance
ROA Pearson
Correlation 1
Sig. (2-tailed)
N 43
Bancassurance Pearson
Correlation -.152 1
Sig. (2-tailed) .332
N 43 43
Mobile
Banking
Pearson
Correlation .061 .259 1
Sig. (2-tailed) .698 .094
N 43 43 43
Real Estate
Finance
Pearson
Correlation .-.086
* .349
* -.068 1
Sig. (2-tailed) .583 .022 .665
N 43 43 43 43 *. Is significant at the 0.05 level (2-tailed).
Finally, correlation between the independent variables and return on equity (ROE)
was carried out. The findings are presented in Table 4.12. From the correlation
analysis, mobile banking (r = 0.067) had a positive and weak correlation with return
38
on equity. However, bancassurance (r = -0.148) and real estate finance (r = -0.034)
had a negative and weak correlation with return on equity.
Table 4. 12: Correlation Analysis for ROE
ROE Bancassurance Mobile
Banking
Real Estate
Finance
ROE Pearson
Correlation 1
Sig. (2-tailed)
N 43
Bancassurance Pearson
Correlation -.148 1
Sig. (2-tailed) .342
N 43 43
Mobile
Banking
Pearson
Correlation .067 .259 1
Sig. (2-tailed) .667 .094
N 43 43 43
Real Estate
Finance
Pearson
Correlation .-.034 .349
* -.068 1
Sig. (2-tailed) .826 .022 .665
N 43 43 43 43 *. Is significant at the 0.05 level (2-tailed).
4.6 Regression Analysis
This section shows how the researcher came up with relevant inferences in line with
the study objectives. The section presents and discusses findings resulting from
regression analysis of the study variables.
4.6.1 Regression Model Summary
The study carried out a regression analysis to test the significance of the effect of the
independent variables on perceived financial performance. The model summary is
depicted in Table 4.13.
Table 4. 13: Regression Model Summary
Model R R2 Adjusted R
2 Std Error of
the Estimate
1 .698a .487 .447 .36847
The R2, the coefficient of determination shows variability in dependent variable
explained by the variability in independent variables. This value tells us how financial
performance of listed commercial banks can be explained by bancassurance, mobile
39
banking and real estate finance. 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. This therefore means that other factors not studied in this study
contribute 51.3% of financial performance.
4.6.2 Multiple Regression Analysis
The researcher further conducted a multiple regression analysis and the findings of the
multiple regression model are depicted in Table 4.14.
Table 4. 14: Multiple Regression Analysis
Model Unstandardized
Coefficients
Standardized
Coefficients
1 B SE B t p
Constant .491 .567 0.865 .392
Bancassurance -.088 .078 -.145
-
1.128 .266
Mobile Banking .205 .086 .287 2.377 .022
Real Estate Finance .743 .130 .710 5.716 .000
From the multiple regression model, holding all independent variables constant,
financial performance of banks would increase by 0.491. Further, it was established
that a unit increase in bancassuarance would cause a decrease in financial
performance by a factor of 0.088, a unit increase in mobile banking would cause an
increase in financial performance by a factor of 0.205 and a unit increase in real estate
finance would cause an increase in financial performance by a factor of 0.743. The
un-standardized beta coefficients in Table 4.14 were then used to obtain the overall
relationship of the independent variables and the dependent variable and model was
formulated as:
Y = 0.491 - 0.088X1 + 0.205X2 + 0.743X3
Where Y = Financial Performance
X1 = Bancassurance,
X2 = Mobile Banking,
X3 = Real Estate Finance,
40
Previous studies such as those of Peng et al., (2015), Ojiambo (2014), Kathuo et al.,
(2015) have reported similar findings though with some variations. Fr example, while
odhiambo (2015) found no relationship between real estate finance and financial
performance, Ojiambo (2014) found positive correlation. Other studies such as those
of Monyoncho (2015) and Bwisa and Wanyonyi (2013) all found positive correlation
between mobile banking and financial performance.
41
CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction
The study sought to establish the influence of portfolio diversification on financial
performance of commercial banks listed on NSE, Kenya. In this chapter the findings
of the study are summarized and conclusions are drawn from the summary. The
conclusions enable the researcher to put across a number of key recommendations.
The summary, conclusions and recommendations are presented in line with study
objectives.
5.2 Summary
The researcher summarized the research findings in the order of the study objectives.
The aim of summarizing was to enable the researcher to come up with key findings
from which conclusions would be drawn.
5.2.1 Influence of Bancassurance on Financial Performance
The study established that bancassurance increases the size of business, increase
economies of scale and the banks’ ability to compete effectively within the financial
industry (3.84), that banks are tapping into the insurance market as a way to diversify
their products to be able to keep up with the hardening competition (4.14),
bancassurance accrues larger risk-adjusted returns leading to improved efficiency
while increasing the shareholders’ value (3.53) and that banking product
diversification promotes better financial performance through increased profitability
(3.56). However, it was unclear whether fee-based income increases due to the
adoption bancassurance products (3.26), whether selling insurance through the bank
promotes bank’s efficiency and enhances portfolio performance (3.42) and whether
selling insurance through the bank increases bank’s commission income, non-interest
income and shareholders’ value (3.49). Correlations results indicated that
bancassurance (r = 0.177) had a positive and weak correlation with financial
performance. The study therefore deduced that despite the correlation being weak,
bancassurance had some effect on financial performance of listed commercial banks.
42
5.2.2 Influence of Mobile Banking on Financial Performance
It was established that many customers who could otherwise be excluded from
mainstream banking, access banking services (3.53). However, it was unclear whether
increased usage of mobile banking increases the financial performance of commercial
banks (3.05), whether improved performance of the listed banks is due to the use of
mobile money transfer for debt collection, business to business transactions and
customer to business (C2B) transactions (3.33), whether banks that have already
adopted mobile banking have largely increased their customer outreach and hence
improved their banking efficiency (2.88), whether frequency of transactions using
money transfer technologies drive more revenues to the bank and increases
profitability (3.19) and whether adoption of mobile banking increases customer access
to loans and hence the bank’s interest earnings (3.47). Further, from correlation
analysis indicated that mobile banking (r = 0.201) had a positive and weak correlation
with financial performance.
5.2.3 Influence of Real Estate Finance on Financial Performance
The study established that that real estate finance provides cover for the secured loans
(3.86), that portfolio yields superior performance in the long run and exhibited higher
growth compared to financial assets over the entire loan period (3.91), that mortgage
finance genarates more incomes and enhances performance (4.37), that stakeholders
in housing industry consider strategies that improve the uptake of affordable mortgage
loans to improve the overall bank performance (3.84) and that real estate finance
increases bank profitability evidenced by increased interest incomes, proceeds from
processing fees, net profits, earnings per share and capital adequacy (3.98). The study
also established that real estate finance (r = 0.640) had a positive and strong
correlation with financial performance. Similarly, real estate finance (p = 0.000) was a
significant predictor of financial performance of listed commercial banks.
5.3 Conclusions
Based on the findings of the study, the researcher has drawn several conclusions
which are presented in this section in line with the objectives of the study.
5.3.1 Influence of Bancassurance on Financial Performance
The study concluded that bancassurance increases the size of business, increase
economies of scale and the banks’ ability to compete effectively within the financial
43
industry, that banks are tapping into the insurance market as a way to diversify their
products to be able to keep up with the hardening competition, that bancassurance
accrues larger risk-adjusted returns leading to improved efficiency while increasing
the shareholders’ value and that banking product diversification promotes better
financial performance through increased profitability. Further, it was concluded that
the more studies need to be undertaken to ascertain whether fee-based income
increases due to the adoption bancassurance products, whether selling insurance
through the bank promotes bank’s efficiency and enhances portfolio performance and
whether selling insurance through the bank increases bank’s commission income,
non-interest income and shareholders’ value. The study thus concluded that
bancassurance had some effect on financial performance of listed commercial banks.
5.3.2 Influence of Mobile Banking on Financial Performance
The study concluded that many customers who could otherwise be excluded from
mainstream banking, access banking services. However, there was lack of clarity
whether increased usage of mobile banking increases the financial performance of
commercial banks, whether improved performance of the listed banks is due to the
use of mobile money transfer for debt collection, business to business transactions and
customer to business (C2B) transactions, whether banks that have already adopted
mobile banking have largely increased their customer outreach and hence improved
their banking efficiency, whether frequency of transactions using money transfer
technologies drive more revenues to the bank and increases profitability and whether
adoption of mobile banking increases customer access to loans and hence the bank’s
interest earnings. From correlation analysis it was concluded that mobile banking had
positive influence on financial performance.
5.3.3 Influence of Real Estate Finance on Financial Performance
The study concluded that that real estate finance provides cover for the secured loans,
that portfolio yields superior performance in the long run and exhibited higher growth
compared to financial assets over the entire loan period, that mortgage finance
genarates more incomes and enhances performance, that stakeholders in housing
industry consider strategies that improve the uptake of affordable mortgage loans to
improve the overall bank performance and that real estate finance increases bank
profitability evidenced by increased interest incomes, proceeds from processing fees,
44
net profits, earnings per share and capital adequacy. The study also concluded that
real estate finance had a positive and strong influence on financial performance of
listed commercial banks.
5.4 Recommendations
After drawing inferences in line with the study objectives, the researcher has proposed
pertinent recommendations. The recommendations are based on the inferences drawn
from the regression analysis and the conclusions drawn.
5.4.1 The study recommends that banks should seek more clarity on whether fee-
based income increases due to the adoption bancassurance products, whether selling
insurance through the bank promotes bank’s efficiency and enhances portfolio
performance and whether selling insurance through the bank increases bank’s
commission income, non-interest income and shareholders’ value.
5.4.2 The study recommends that banks should further undertake empirical research
on the overall role of mobile banking on their financial performance since majority of
their portfolio managers were unsure as to whether it had any influence on financial
performance.
5.4.3 The study recommends that listed commercial banks diversify their real estate
finance schemes to make it reachable to more customers since real estate had a
significant effect of their financial performance.
5.5 Suggestions for Further Studies
It is suggested further research be conducted on other variables such interest rates
fluctuations, inflation and exchange rates. Future research should focus on all
commercial banks since the current study focused on listed commercial banks only.
Finally, future research should investigate the influence of these variables on financial
performance of other players in the financial industry such as MFIs and SACCOs.
45
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APPENDICES
Appendix 1: Letter of Introduction
Agnes Chepkorir
P. O. Box 248-20115
EGERTON
Dear Sir/Madam,
RE: PERMISSION TO COLLECT RESEARCH DATA
I am a Master of Business Administration student at Jomo Kenyatta University of
Agriculture and Technology doing a research entitled “Influence of Portfolio
Diversification on Financial Performance of Commercial Banks Listed on
Nairobi Securities Exchange, Kenya”. This research forms part of the requirement
for my masters qualification. I would appreciate if you would kindly permit me to
obtain and utilize your financial data.
Any information obtained from you is purely for academic purposes and will be
treated with strictest confidentiality. I, therefore, take this opportunity to thank you in
advance for allowing me to use your financial information for this research study
Thank you.
Yours faithfully,
Agnes Chepkorir
49
Appendix 2: Research Questionnaire
Dear respondent,
This questionnaire is meant to collect data for research on the Influence of Portfolio
Diversification on Financial Performnance of Commercial Banks Listed on
Nairobi Securities Exchange, Kenya. You have been identified as one of the
respondents for this research and so you are requested to be honest and provide
information exhaustively. The Information is purposely intended for academic
purpose only and will not be divulged to any other use. Kindly complete all the
sections hereunder.
SECTION A: BIO DATA
1. Gender: Male Female
2. Age: Below 21 years
21 – 30 years
31 – 40 years
41 – 50 years
Over 50 years
3. Education
Professional Training Diploma Degree Masters and above
4. Prior experience in Portfolio Management
0-5 years 5-10 years 10-15 years Over 15 years
5. How long have you maintained the present product portfolio
0-5 years 5-10 years 10-15 years Over 15 years
50
SECTION B: BANCASSURANCE
The following statements relate to Bancassurance. Using the key (Where: SA-
Strongly Agree; A – Agree; I – Indifferent; D – Disagree; SD – Strongly Disagree)
tick as appropriate to indicate the extent to which you agree or disagree with each
statement.
No. Statement SA A I D SD
6. Banccasurance increases the size of business, increase
economies of scale and the banks’ ability to compete
effectively within the financial industry
7. Banks are tapping into the insurance market as a way to
diversify their products to be able to keep up with the
hardening competition
8. Bancassurance accrues larger risk-adjusted returns leading
to improved efficiency while increasing the
shareholders’value
9. Banking product diversification promotes better financial
performance through increased profitability
10. Fee-based income increase due to the adoption
bancassurance products
11. Selling insurance through the bank promotes bank’s
efficiency and enhances portfolio performance
12. Selling insurance through the bank increases bank’s
commission income, non-interest income and shareholders’
value
51
SECTION C: MOBILE BANKING
The following statements relate to Mobile Banking. Using the key (Where: SA-
Strongly Agree; A – Agree; I – Indifferent; D – Disagree; SD – Strongly Disagree)
tick as appropriate to indicate the extent to which you agree or disagree with each
statement.
No. Statement SA A I D SD
13. Many customers who could otherwise be excluded
from mainstream banking, access banking services
14. Increased usage of mobile banking increases the
financial performance of commercial banks
15. Improved performance of the listed banks is due to the
use of mobile money transfer for debt collection,
business to business transactions and customer to
business (C2B) transactions
16. banks that have already adopted mobile banking have
largely increased their customer outreach and hence
improved their banking efficiency
17. Frequency of transactions using Money Transfer
technologies drive more revenues to the bank and
increases profitability
18. Adoption of mobile banking increases customer access
to loans and hence the bank’s interest earnings
52
SECTION D: REAL ESTATE FINANCE
The following statements relate to Real Estate Finance. Using the key (Where: SA-
Strongly Agree; A – Agree; I – Indifferent; D – Disagree; SD – Strongly Disagree)
tick as appropriate to indicate the extent to which you agree or disagree with each
statement.
No. Statement SA A I D SD
19. Real estate finance provides cover for the secured loans
20. Portfolio yields superior performance in the long run and
exhibited higher growth compared to financial assets
over the entire loan period
21. Mortgage finance genarates more incomes and enhances
22. Stakeholders in housing industry consider strategies that
improve the uptake of affordable mortgage loans to
improve the overall bank performance
23. Real estate finance increases bank profitability
evidenced by increased interest incomes, proceeds from
processing fees, net profits, earnings per share and
capital adequacy
53
SECTION E: FINANCIAL PERFORMANCE
The following statements relate to Financial Performance. Using the key (Where:
SA-Strongly Agree; A – Agree; I – Indifferent; D – Disagree; SD – Strongly
Disagree) tick as appropriate to indicate the extent to which you agree or disagree
with each statement.
No. Statement SA A I D SD
24. The uptake of real estate finance is high, hence it
generates more income to the banks
25. Customer acquisition and the bank’s portfolio
marketability have increased
26. Interest income has improved due to the increased uptake
of loans through mobile banking
27. The demand for housing, mortgage and construction
financing have increased the demand for real estate
finance hence increased bank revenues and profitability
28. Returns on Equity have increased due to increased
business efficiency and profitability
54
Appendix 3: Data Collection Sheets
Bank Year Net
Income
Total
Assets
Equity/
Capital
Total
Loans
Total NPL Operating
Expenses
1 2016 178650 1707890 1148987 8174078 1897455 390941
2015 121620 16942552 1042500 8043938 1869831 359892
2014 220592 16944142 347500 8527632 1322265 390941
2013 189433 15574646 347500 8108467 1189931 377115
2012 73779 13411458 347500 6931620 1132396 279647
2 2016 709342 20043490 607501 12958167 0 560411
2015 713800 20020072 607501 13124420 0 553537
2014 464345 17244092 588721 10979238 0 410858
2013 431903 13644242 588721 8363452 0 366781
2012 350532 10322819 588721 5291220 0 231081
3 2016 374897 19457305 1469138 14170233 1200218 1790083
2015 372320 19106500 1469138 12519387 1607630 1782571
2014 514043 15801431 1139613 10453714 776423 1591719
2013 355060.5 12673740.5 1139613 8704248.5 882041.5 1497006
2012 196078 9546050 1139613 6954783 987660 1402293
4 2016 112476 14278600 1619530 9208980 2013563 1520078
2015 44422 14135528 1619530 9221256 2330985 1377562
2014 -281632 15077051 1119530 9125810 1382349 1207539
2013 -109108 16778631 1119530 10855492 1149632 1254943
2012 139249 18064213 1119530 10077068 813243 1179315
5 2016 3601766 214765002 5816090 113007844 8901500 9431007
2015 3592324 215625182 5755468 112925594 7614397 9583748
2014 3478580 197463704 5300923 99674489 6387098 8504473
2013 3740700 145998378 4915402 70759781 1768994.55 5583847
55
2012 3123257 118300651 4915402 53120504 10624100.8 4485458
6 2016 1298770 49067540 450000 17298700 381409 600176
2015 1107937 44162947 450000 17857613 363819 565939
2014 1034293 34370422 450000 12375611 710690 418707
2013 1023458 30721440 450000 10672752 107418 367123
2012 685440 24876824 450000 10014941 157993 359066
7 2016 4711091 171909220 3199728 125545899 1298706 5911004
2015 4485125 165788238 3199728 114657644 11762498 5648417
2014 4116674 145780505 3199728 100575330 7236684 4846475
2013 3237301 1219062739 2714921 83493313 6597413 4320742
2012 3036794 108348593 2714921 71541092 3209075 3500673
8 2016 361055 21398115 140046 6401005 1294512.4 167450
2015 335126 21180018 140046 6047132 1209426.4 167450
2014 300576 17802177 140046 5683497 1136699.4 164240
2013 218630 16285573 126609 5352033 1070406.6 164240
2012 216394 15290582 115099 4745500 949100 152000
9 2016 101563 1567654 432087 8500675 3417700 1238654
2015 -486382 14469562 3820315 8321620 3387828 1450620
2014 -323017 16589359 2420035 10006792 3027971 1855179
2013 55650 15562476 1371482 9029000 5562476 879163
2012 -481940 14108996 722314 7538422 4108996 1017983
10 2016 61499 2778976 18140 1184835 606411 72504
2015 59654 2752622 18140 1036637 698865 71212
2014 47907 2762573 16491 1071859 187935 68489
2013 46601 2642296 16491 937620 13439 51027
2012 54766 2217417 16491 658922 16936 48252
11 2016 41145 549321 150000 4011756 151998 6458
56
2015 39000 543800 150000 3926000 106002 6000
2014 16300 533100 150000 3822000 145236 5600
2013 36264 777415 150000 2579303 515860 1737
2012 40379 785042 150000 2351321 470264 1599
Key
1. Kenya Commercial Bank
2. Barclays Bank
3. Diamond Trust Bank
4. National Bank of Kenya
5. NIC Bank
6. Standard Chartered Bank
7. Cooperative Bank
8. Equity Bank
9. I & M Bank
10. CFC Stanbic Bank
11. Family Bank
57
Appendix 4: Average ROA and ROE
Bank Average ROA Average ROE
1. Kenya Commecial Bank 4.73 21.9
2. Barclays Bank 4.60 22.2
3. Diamond Trust Bank 2.28 18.6
4. National Bank of Kenya 1.64 17.6
5. NIC Bank 1.68 17.8
6. Standard Chartered Bank 3.98 24.1
7. Cooperative Bank 3.03 22.2
8. Equity Bank 5.21 26.3
9. I & M Bank 2.91 19.9
10. CFC Stanbic Bank 3.92 23.1
11. Family Bank 3.87 22.1
58
Appendix 5: Research Authorization Letter
59
Appendix 6: Research Permit
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