EFFECT OF LOAN PORTFOLIO GROWTH ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

Abstract

Loans comprise the single largest asset for commercial banks. To grow the banks’ assets bank managers focus on growing the amount of loans granted by the bank. The general objective of this study was to evaluate the effect of growth in loan portfolio on financial performance of commercial banks in Kenya. Specifically the study was seeking to evaluate the effect of growth in commercial bank’s loan book, the effect of change in banks asset quality, the effect of change in banks liquidity and the effect of change in banks capital adequacy on the financial performance of commercial banks in Kenya. The study sought to test the following hypotheses: loan growth has no effect on financial performance of commercial banks; asset quality has no effect on financial performance of commercial banks; liquidity has no effect on financial performance of commercial banks and capital adequacy has no effect on financial performance of commercial banks. The study used a regression research design. The population of interest consisted of the 44 commercial banks in Kenya. A sample of 31 commercial banks was selected. The study covered a five-year period from 2011 to 2015. The study used primary and secondary data. A questionnaire was used to collect the primary data while secondary data was obtained from published financial statements of commercial banks. Data was analyzed using descriptive statistics and summarized in frequency tables. Multiple linear regression was also used in the analysis. The study found that growth in loan portfolio had a negative effect on financial performance of commercial banks in Kenya. The effect was significant. The effect of loan growth on financial performance of commercial banks in subsequent years was found to be adverse. This study found that the quality of banks assets had a positive effect on financial performance of commercial banks in Kenya. The effect of asset quality was found to be statistically significant. It was found that liquidity management had negative effect on financial performance of commercial banks, that banks that hold a high level of liquid assets perform poor financially. However the effect of liquidity management was not significant. The study found that capital adequacy had a positive effect on financial performance of commercial banks. The effect of capital adequacy was significant. The study concluded that growth in a bank’s loan portfolio had a negative and significant effect on financial performance of commercial banks. The study concluded that the quality of a banks’ loan portfolio had a positive and significant effect on financial performance of commercial banks in Kenya. Further the study reached a conclusion that high level of liquidity for commercial banks in Kenya has a negative but not significant effect on financial performance of commercial banks in Kenya. Finally the study concluded that amount of bank capital has a positive and significant effect on financial performance of commercial banks in Kenya. The study recommended that commercial banks should strategically execute their loan portfolio growth strategies so as to minimize the problem of loan losses in subsequent years. It also recommended that to enhance financial performance banks should ensure they maintain a high quality loan portfolio. Also the study recommends that in order to minimize the negative of high liquidity, commercial banks should identify and maintain optimal levels of liquid assets. The study also recommended to improve financial performance commercial banks in Kenya should increase the amount of core capital.