Residential Mortgage Portfolio, Firm Characteristics and Performance of Commercial Banks in Kenya

Abstract

The purpose of this study was to investigate the relationship between residential mortgage portfolio,
product innovation, firm characteristics and performance of commercial banks in Kenya. Two of the
specific objectives were to establish the effect of the relationship between residential mortgage portfolio
and bank performance, and to determine the moderating effect of firm characteristics on the relationship
between residential mortgage portfolio and bank performance. The study was anchored on the Modern
Portfolio Theory (main anchoring), Agency Theory and Asymmetric Information Theory. It was guided by
the positivism philosophy and principles and adopted correlational descriptive research design. The study
collected and utilized panel data from the annual residential mortgage surveys conducted by the central
bank of Kenya (CBK) on commercial banks covering a 13-year period from 2006 to 2018. Secondary data
was collected from the financial statements of commercial banks and Kenya Bankers Association database.
Data was analyzed using descriptive and inferential statistics. Hypotheses were tested through the panel
regression models and the Baron and Kenny (1986) model. The results revealed that residential mortgage
portfolio attributes, namely: portfolio quality and mortgage interest return, significantly influence bank
performance. For firm characteristics, firm age influences the relationship between portfolio quality
together with mortgage interest return and performance but does not moderate the relationship with
portfolio size. The study recommended that bank managers should pay attention to the institutional
environment and firm characteristics in designing their mortgage loan portfolios. And for performance of
commercial banks to improve, mortgage portfolio contribution through portfolio quality and interest return
should be ensured through sound credit management practices. Future studies should consider the use of
residential mortgage portfolio as a composite variable based on tested methodologies for more insight on
bank performance. .

Keywords: Residential mortgage portfolio, Product innovation, Firm characteristics, Commercial banks.