Effect of mortgage financing on financial performance of commercial banks in Kenya

Abstract

The financial performance of commercial banks has been unstable as evidenced in Annual Supervision Report of 2011 to 2020, where the Return on Assets (ROA) rose to 6.2% in 2012 from 3% in 2011; and to below 3% in the years 2016 to 2020. Literature reveals that commercial banks’ lending criteria are pro-cyclical, implying a less strict lending criteria during the real estate boom, and very strict during burst; resulting in likely underestimation of the default risk on loans during periods of high demand by the commercial banks. The objective of the study was to establish the effect of mortgage financing on the n financial performance of commercial banks in Kenya for the period 2015 to 2022. Using secondary balanced panel data from 27 mortgage-offering banks in Kenya, with 189 data points and employing moderated multiple regression to achieve the study objectives. The regression analysis revealed that the independent variables explained 86.69% (R2 = 0.8669, p-value = 0004) of variance in of financial performance of commercial banks in Kenya, the coefficient of mortgage financing is 0.004434, (p=0.0004); implying that a unit increase in mortgage loan would result to significant increase in the return on assets by 0.004434 units. Therefore, the null hypothesis was rejected. The study concluded that an increase in the amount of mortgage loans offered as well as other activities that augment the total value of mortgage loans extended by the commercial banks leads to a significant improvement in the financial performance of commercial banks in Kenya. The study recommends that commercial banks in Kenya should target to increase the amount of mortgage offered as well as other activities that augment the total value of mortgage loans extended in order to improve their financial performance.