Mortgage Financing and Financial Performance of Commercial Banks in Kenya
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Date
2025-05
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Kenyatta University
Abstract
There is a high demand for housing in Kenya. This is due to continuous growth in population. Mortgages from banks are crucial in fulfilling this demand. Financial performance of commercial banks has however, been declining. The main objective of this study was to investigate how mortgage financing influences the financial performance of commercial banks in Kenya. It specifically aimed to understand the impact of interest rates, borrower income levels, and repayment periods on the financial performance of Kenyan banks. It relied on Keynes’s liquidity preference, absolute income, and title and lien theories. Causal research design was used. Thirty-one mortgage offering commercial banks were the data sources. Secondary data was used. The target commercial banks yearly financial data, Central Bank of Kenya, and Kenya Banker’s Association provided the secondary data. No sampling was done since the study used all mortgage offering banks. The analysis involved using descriptive statistics to summarize the data and panel regression to explore relationships between variables. Diagnostic tests done included the bivariate correlation analysis, multicollinearity test, unit root test and heteroscedasticity test. STATA software was used for data analysis. The National Council of Science and Technology (NACOSTI) and the university both provided the researcher with a letter granting permission to gather data. Diagnostic tests done included bivariate correlation analysis, multicollinearity test, normality test, unit root test, heteroscedasticity test, the analysis of variance. The findings revealed that interest rate charged on mortgage loan, log of income level of borrowers and mortgage loan repayment period jointly explains forty three percent of the differences on how mortgage offering banks perform financially. They further showed a negative relationship between mortgage lending banks performance and interest rate; natural logarithm of income level of borrowers positively and significantly affected the financial performance of mortgage issuing Kenyan banks and mortgage loan repayment period had a positive impact on mortgage offering Kenyan banks. The study comes to the conclusion that the income level of borrowers and lending period positively impact the financial performance of banks while interest rate has a negative effect. Mortgage lending significantly improves Kenyan mortgage selling banks' financial performance. The ever-increasing demand for houses encourages individuals to take mortgages and improves the financial efficiency of Kenyan banks when default rate is low. This study thus recommends that Kenyan banks offering mortgages should increase mortgage repayment period and charge an affordable rate as this will increase the demand for mortgages which will in turn positively influence their financial performance. This research enriches the already existing work about the impact of mortgage financing on the performance of banks. Consequently, it suggests that the policy makers should enact a law capping interest charged on mortgage by Kenyan commercial banks. Moreover, future research studies should incorporate other managerial controllable variables like income diversification and branch size that can affect how Kenyan banks perform financially.
Description
A Research Project Submitted to the School of Business Economics and Tourism in Partial Fulfillment of the Requirement for the Award of the Degree of Master of Business Administration (Finance) of Kenyatta University, May 2025
Supervisor;
1. James Gatauwa