Relationship Between Asset Structure And Financial Performance Of Commercial Banks In Kenya

Abstract

Commercial banks are very important components of any economy globally. When the bank management are making decision must bear in mind the effect that the decision will have on the financial performance of the bank. A proper asset allocation and distribution should be undertaken to ensure optimum and efficient utilization of these assets. Efficient utilization of assets translates to high income to the banks. This study sought to determine the relationship that commercial banks assets structure have on the on their financial performance in Kenya. The study had sought to attain the following specific objectives; examine the relationship of investments in government securities, loans to customers and investment in fixed assets on financial performance of commercial banks in Kenya. The theory is based on balance portfolio theory, efficient structure hypothesis and the black litter man theory. Descriptive study design was applied in this study. The population target for this study is 42 commercial banks in Kenya and after census, the result of the study covered 32 commercial banks. The study used secondary data from each banks published financial statements. The study applied descriptive statistics analysis, correlation statistical analysis and regression statitstical analysis to analyze the balanced panel data collected during the period 2008 to 2017. STATA was used to conduct the analysis. Results were presented in graphs and tables. The study used random effect model which was found to be appropriate after carrying out hausman test. Various diagnostic test were done for the study. From the study, correlation analysis results showed that loans to customer had a positive relationship with financial performance with a coeffiecient estimate of .0631. There was negative relationship between investment in government securities and fixed assets as correlation results gave coefficient estimates of -.443 and -.0238 respectively. Various diagnostic tests were carried out including multicollinearity test, autocorrelation, stationarity test and heteroscedasticity. The regression model indicated that 18.56% of financial performance of commercial banks in Kenya is explained by the variables in the study leaving 81.44% as unexplained. The study findings indicated an intercept of .62 for the period under review which meant that the performance of commercial banks holding all other factors constant, that is; loans to customers, investments in government securities and fixed assets at zero, was .62 units.The results found coefficients of the variables where loans to customer had .28, investment in government securities had -.28 and the fixed asset had a coefficient of -.89. The study found significant relationship between investment in government securities and fixed assets and the commercial banks financial performance while the relationship with loans to customers was inconclusive.The study recommends that managers and decision makers in banking industry should ensure the assets are properly distributed and efficiently utilized to ensure they generate revenue to the banks.