Loan Portfolio Management and Financial Efficacy of Listed Commercial Banks in Kenya.

Thesis Title: Loan Portfolio Management and Financial Efficacy of Listed Commercial Banks in Kenya.

Student’s Name:   Nasong’o Nafula Christine

Supervisor’s Names:

1. Rashid Fwamba
2. Tecla Kirwa

Abstract:

This study determined the relationship between loan portfolio management and financial efficacy of listed commercial banks in Kenya. The financial sector performs a key role in the development of a country and the world at large. Banks operate in an environment of considerable risks and uncertainty due to various challenges experienced over time. Most commercial banks have registered unsatisfactory financial efficacy largely related to ineffective Loan portfolio management. The main objective of this study was to establish the relationship between Loan portfolio management and financial efficacy of listed commercial banks in Kenya while internally focusing on the mortgage appraisal, liquidity hazard, debt recuperation and credit policy, as the key dimensions within commercial banks that determine their respective financial efficacy. Asymmetry information theory and Modern portfolio theory model were employed. The target population comprised of 385 commercial banks management staff out of which using the purposive sampling method and Yamane formula 84 respondents were selected. Data was gathered at commercial banks headquarters in Nairobi. A mixed method research design was adopted in the study. This research consisted of both quantitative and qualitative paradigms. This study utilized probability and non-probability sampling procedures to sample target groups. Primary data was obtained directly from respondents using a closed and open-ended questionnaire while Secondary data was obtained from publications and reports. Reliability was measured by Cronbach’s alpha test at a minimum threshold of 0.7. This data was analyzed using multiple regression models. IBM SPSS Statistics version 30 was used in analyzing correlations amongst the variables. A multiple regression model was used to analyze the data. According to the findings, mortgage appraisal has a statistically significant positive effect ( ?= 0.698, p = 0.034) on the financial efficacy of commercial banks in Kenya; Liquidity hazard has a significant positive effect ( ? = 0.648, p = 0.000) on the financial efficacy of commercial banks in Kenya, debt recuperation has a significant positive effect ( ? = 0.657, p = 0.000) on the financial efficacy of commercial banks in Kenya and credit policy has a significant positive effect ( ? = 0.612, p = 0.000) on the financial efficacy of commercial banks in Kenya. Based on the findings of the study, it was concluded that loan portfolio management under consideration mortgage appraisal, liquidity hazard, debt recuperation and credit policy significantly influenced financial efficacy of listed commercial banks in Kenya. Therefore, the study recommends that for commercial banks to remain profitable they should have loan portfolio management which will help them in making prudent decisions about loan investment mix and policy, matching investments to objectives. Level of loan asset allocation for banking institutions should be balanced against risk and financial performance. Also, it recommends that loan portfolio management techniques employed by banks should focus more on strategic issues for a portfolio of projects and the ability to achieve strategic objectives. In addition, it further recommends that commercial banks should not ignore other non-loans factors for they have fair constant contribution to the overall profitability of the banks. Since credit policy was found to strongly influence profitability of banks, Commercial banks in Kenya should concentrate on advancing more of these policies to enhance their general performance.