The Effect of Real Estate Financing on Financial Performance of Insurance Companies in Kenya

Abstract

Insurance companies have been playing a significant role in the commercial and multifamily market for many decades. Through decades of experience including many market cycles, insurers have developed loan structures that have become the standard for many competitors entering the long-term lending market. The insurance industry contributes to the economy by providing financial security, mobilizing savings and promoting direct and indirect investments. The gross domestic product (constant prices) expanded by 4.9% in 2017 while insurance penetration reduced from 2.71% in 2016 to 2.68% in 2017. Although insurance companies have been investing in residential mortgages, this kind of investment has continued to be smaller and smaller in percentage of their portfolio. This makes the financial performance of the insurance companies to be affected greatly. As a result, the country’s financial system becomes at risk. The study sought to investigate the effect of real estate financing on the financial performance of insurance companies in Kenya. This study was motivated to establish the effect of mortgage financing on profitability of insurance companies in Kenya. The study sought to answer these specific objectives: the effect of mortgage repayment on financial performance of insurance companies, determine the effect of interest rate of mortgage borrowing on financial performance of insurance companies and to determine the relationship between volume of mortgage lending and financial performance of insurance companies. The study was guided by three main theories: tittle and lien theory, interest rate theory and mortgage value model. The population of this study comprised data for six listed insurance companies for the period 2011 to 2018 yielding 48 data points. The study used Secondary data which was reviewed from CBK and NSE reports. Data was obtained from audited reports which are deemed reliable and valid. Regression analysis and correlation was used for analysis on the collected data. The findings of the study were that mortgage borrowing rate negatively affects financial performance of insurance companies listed at NSE (β = - .5144 (p = .0124); mortgage repayment significantly negatively affects financial performance of insurance companies listed at NSE (β = -.0057 (p = .035) and mortgage volume significantly positively affects financial performance of insurance companies listed at NSE (β = 0.2302 (p =. 0215).This study contributes to literature by providing the link between real estate financing and the financial performance of insurance companies in Kenya.