Relationship between Volume of Mortgage Lending and Financial Performance of Commercial Banks Quoted in Nairobi Securities Exchange

Abstract

Mortgage loans have become an important aspect of loan portfolio among commercial banks in Kenya. It is observed that commercial banks’ lending criteria are pro-cyclical. As a result, they are likely to underestimate the default risk of the loans during periods of high demand, leading to price inflation which increases the banks’ credit risk exposure to mortgage product. With a sharp drop in demand for mortgage finance, commercial banks with high proportion of mortgage loans in their portfolios suddenly find themselves faced by a high exposure. This affects their financial performance significantly. However, from reviewed literature little has been covered on the relationship between mortgage financing and performance of commercial banks. The purpose of this study was to determine the relationship between mortgage financing and financial performance of commercial banks quoted in NSE. Mortgage Value Model theory guided the study. Secondary data was reviewed from CBK and NSE reports, between January 2006 and December 2014, giving 99 data points. Data obtained from audited reports were deemed reliable and valid. This study adopted correlation design. the inferential analysis indicated a significant negative correlation at 95% interval level between the financial performance variables (ROE, ROA and NIM) and the main independent variable (Mortgage volume), that is -0.326, -0.2591 and -0.208 respectively. This helped to show that there are no any serial correlations. This implied that there was a weak negative relationship between ROE, ROA and NIM and Mortgage volume. The study may help in formulation of policies related to mortgage financing and financial performance of commercial banks. Further by advancing a model that relates mortgagefinancing and financial performance