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.

vi

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

vii

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

ix

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

x

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

xi

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)

1

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

3

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.

4

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

7

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.

8

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

REFERENCES

Alkhatib, A., & Harsheh, M. (2012). Financial Performance of Palestinian

Commercial Banks. International Journal of Business and Social Science,

3(3), 175-184.

Arora, A. & Jain, M. (2013). An Analysis on Contribution of Bancassurance on

Financial Performance of Bank of India. Journal of Economics and

Sustainable Development.

Bello, M. O., & Adewusi, A. O. (2009). A Comparative Analysis of the Performance

of Real Estate and Financial Assets as Security for Mortgage Lending in

Nigeria. FIG Working Week: Surveyors Key Role in Accelerated Development,

pp. 1-11.

Brophy, R. (2013). Bancassurance: An Insurance Concept from a Irish Perspective.

Journal of Financial Regulation and Compliance, DOI: 10.1108/JFRC-12-

2012-0052.

Bwisa, H. M., & Wanyonyi, P. W. (2013). Influence of Mobile Money Transfer

Services on the Performance of Micro Enterprises in Kitale Municipality.

International Journal of Academic Research in Business and Social Sciences,

3(5), 500-517.

Dermish, Ahmed, Kneiding, Christoph, Leishman, Paul, et al. (2011). Branchless and

Mobile Banking Sollutions for the Poor: A survey of the Literature.

Innovations 6.4, pp. 81-98.

Dirnhofer, V. (2012). The Impact of Mortgage Backed Securities on Bank

Performance during the Financial Crisis. Unpublished MSc Finance Project,

Tilburg University.

Donaldson, T. & Preston, L. E. (1995). "The Stakeholder Theory of the Corporation:

Concepts, Evidence, and Implications. Academy of Management, 65-91.

Fabozzi, F. J., Gupta, F. & Markowitz, H. M. (2002). The Legacy of Modern Portfolio

Theory. The Journal of Investing, pp. 7-22.

Hussen, D. M. (2015). Access of Financial Sevice: Supply Side Barriers in the

Banking Industry of Ethiopia. European Journal of Business and

Management, Vol 7, No 4 .

Islam, A. (2014). An Analysis of the Financial Performance of National Bank Limited

Using Financial Ratio. Journal of Behavioural Economics, Finance,

Entrepreneurship, Accounting and Transport, 2(5), pp. 121-129.

Kathuo, S., Rotich, G., & Anyango, W. (2015). Effect of Mobile Banking on the

financial Performance of Banking Institutions in Kenya. The Strategic Journal

of Business and Change Management, 2(98), pp. 1440-1457.

46

Khrawish, H. A. (2011). Determinants of Commercial Banks Performance: Evidence

from Jordan. International Research Journal of Finance and Economics, 5(5),

19-45.

Kiilu, M. R., & Ngugi, K. (2014). Effect of Public Financial Management Reforms in

the Effective Maagement of Punblic Funds in Kenya: A Case Study of the

National Treasury. European Journal of Business Management, 2(1), 161-169.

Kombo, K. &. (2006). Proposal and Thesis Writing. Makuyu : Pauline Publications.

Makokha, A. N., Namusonge, G. S., & Sakwa, M. (2016). Effect of Portfolio

Diversification on Commercial Banks Financial Performance in Kenya.

International Journal of Business and Management Invention, vol. 15 (9), pp.

05-08.

Monyoncho, L. N. (2015). Relationship Between Banking Technologies and Financial

Performance of Commercial Banks in Kenya. International Journal of

Economics, Commerce and Management, 3(11), 784-815.

Mutega, G. M. (2015). The Effect of Asset Diversification on the Financial

Performance of Commercial Banks in Kenya. Unpublished Research Project.

University of Nairobi.,1-58.

Mwara, M. N., & Okello, B. (2016). Assessment of use of Diversification Strategy in

Enhancing Competitive Performance at Equity Bank, Kenya. International

Journal of Finance and Banking Research, 2(2), 40-48.

Namazi, M. (2013). Role of the Agency Theory in Implementing Management's

Control. Journal of Accounting and Taxation, vol. 5(2), . 38-47.

Odhiambo, F. O. (2015). The Effect of Real Estate Finance on Financial Performance

of Listed Commercial Banks inn Kenya: A Panel Evidence. Journal of

Finance and Accounting, 3(4), 61-68. .

Ojiambo, L. A. (2014). The Effect of Real Estate Finance on Financial Performance

of Commercial Banks Listed on the Nairobi Securities Exchange. Unpublished

Thesis, pp. 1-56.

Omisore, I., Yusuf, M., & Nwufo, C. I. (2012). The Modern Portfolio Theory as an

Investment Decision Tool. Journal of Accounting and Taxation, vol. 4(2), p.

19-28.

Onduso, E. A. (2013). The Effect of Budgets on Financial Performance of

Manufacturing Companies in Nairobi County. Unpublished thesis. University

of Nairobi, 1-93.

47

Ongore, V. O., & Kusa, G. B. (2013). Determinants of Financial Performance of

Commercial Banks in Kenya. International Journal of Economics and

Financial Issues, vol. 3(1), pp. 237-252.

Otieno, O. A., & Moronge, M. (2014). Influence of Product Diversification on the

Financial Performance of Selected Commercial Banks in Kenya. European

Journal of Business Management, 1(11), 336-341.

Peng, J. L., Jeng, V.,Wang, J. L., & Cheng, Y. C. (2015). The Impact of

Bancassurance on Efficiency and Profitability of Banks: Evidence from the

Banking Industry in Taiwan. Department of Risk Management and Insurance

at the National Chengchi University, Taiwan.

Rop, M. K., Kibet, Y., & Bokongo, J. (2016). Effect of Investment Diversification on

the Financial Performance of Commercial Banks in Kenya. Journal of

Business and Management, volume 18 (11), pp. 102-115.

Sorina, O. C. (2012). Bancassurance Development in Europe. International Journal of

Advances in Management and Economics, 1(6), 64-69.

Waweru, T. N. (2014). The Effect of Bancassurance on the Financial Performance of

Commercial Banks in Kenya. Unpublished research project. University of

Nairobi, 1-60.

Yan, M., Talavera, O., & Fahretdinova, A. (2016). The Effects of Product

Diversification on Bnk Performance: Evidence From Azerbaijan. Elsevier, 1-

37.

48

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