Portfolio Diversification and Profitability of Commercial Banks in Kenya
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Date
2025-05
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Kenyatta University
Abstract
The global trend in commercial banking profitability has taken a hit, especially in the 2023 economic climate. It is intricate to control a bank’s portfolio efficiently, concurrently decrease income, lower risks and be bound to managerial and policy constraints. The main problem undertaken by this study was that of the gap that exists in the study of diversification in a portfolio and gainfulness of commercial banks in Kenya. Whereas diversification was seen as a strategy to mitigate risks and enhance profitability, there was limited empirical evidence of its influence on Kenyan commercial banks’ profitability. Numerous studies undertaken in Kenya and beyond have examined portfolio diversification. However, there is still a gap in understanding the direct association pitting variation strategies and the success of Kenya-based commercial banks; to seal in the existing literature gap; the study thus sought to investigate the effects of portfolio variation on the gainfulness of Kenya-based commercial banks. The study's general objective was to investigate the influence of product and service variation on the monetary profitability of Kenya’s financial entities. Four particular objectives guided this study: to uncover the effect of sectorial credit, revenue, deposit diversification and diversification of venture on the gainfulness of Kenya commercial banks. This analysis intended to determine the regulating influence of bank vastness on the link pitting banks’ multiplication of portfolios and their monetary profitability in Kenya. To guide the study, Modern Portfolio Theory, Liquidity Preference Theory, Transaction Cost Theory, and Arbitrage Pricing Theory were used. The study targeted the financial-related data for all 39 commercial banks in Kenya from the year 2018 – 2023. The study further conducted an empirical review of previous literature to identify study gaps. Descriptive and explanatory research designs were used, with data collection methods being secondary sources for quantitative data. Quantitative data analysis involved descriptive statistics; regression analysis was done to scrutinize the impact of portfolio diversification on profitability. Tests for normality, linearity, and Augmented Dickey-Fuller Test were conducted before adopting regression. The confidentiality and anonymity of participants were upheld and the data was only accessible to the researcher and the supervisor. Regression analysis revealed that sectoral credit diversification, deposit diversification, investment diversification and Revenue Source diversification are all positive and significant. Bank size moderates the relationship between portfolio diversification and profitability of commercial banks in Kenya. The study highlighted the need for further research on the long-term sustainability of diversification strategies, especially in Kenya's banking sector. The study suggested that banks in Kenya consolidate credit information, and cautiously diversify income streams to avoid financial risks. Strategic investments in government securities, real estate, and market securities are recommended. Further research is needed on sectoral credit diversification, long-term sustainability, and the influence of external factors on profitability.
Description
A Research Project Submitted to the School of Business, Economics and Tourism in Partial Fulfillment for the Award of Degree in Master of Business Administration (Finance) of Kenyatta University, May, 2025
Supervisor:
1.Moses Odhiambo Aluoch