Relationship between Asset Securitization and Financial Performance of Listed Commercial Banks in Kenya

Abstract

The economic aspect of any nation is strengthened by a well-regulated and managed banking sector. Most commercial banks in Kenya are faced with low financial performance because of capital deficiency, liquidity deficiency and non-performing loans due to defaulted loans. This study examined the relationship between asset securitization and financial performance of listed commercial banks in Kenya. The objectives of the study assessed the influence of asset-based securities, mortgage backed securities and collateralized debt obligation on financial performance of listed commercial banks in Kenya. It adopted three theories which were: regulatory arbitrage theory, convenience yield theory and credit creation theory. Application of descriptive survey research design when collecting data using closed-ended questionnaires from 11 listed commercial banks in Kenya was applied. The required information was provided by risk managers, finance managers, compliance managers and operations managers. All the listed commercial banks were included since the population was small. To ensure validity and reliability, pre-testing of questionnaires was done by eight respondents who were selected by simple random technique. The collected data was then coded using the SPSS 24.0 computer program. The coded data was analyzed quantitatively using the descriptive statistics where mean, percentage and standard deviation were computed. Inferential statistics was used. Linear regression was used to test hypothesis while multiple regression was used to test the overall model. Results were presented using tables, graphs and detailed explanations. The study established that asset backed securities, mortgage backed securities and collateralized debt obligations positively and significantly influence financial performance of listed commercial banks in Kenya. However, collateralized loan obligations’ influence is weak. There was hence a weak positive relationship between collateralized debt obligations and financial performance in listed commercial banks in Kenya. The study concluded that asset backed securities improve financial performance; mortgage backed securities on average improve financial performance; and collateralized debt obligations do not improve financial performance of the listed commercial banks. The study recommended that commercial banks should expand their horizon by incorporating bancassurance products to improve asset backed securities. The commercial banks ought to finance mortgages that have adopted new technology such as fabrication of shipment containers. Government of Kenya should develop policies to guide commercial banks from going bankrupt due to default by mortgage borrowers. The banks should raise awareness and educate the public on what CDOs entail and how they are operated. This study was valuable to commercial banks as they are able to realize the essence of asset securitization and its implication on financial performance of banks. Through this study, commercial banks would learn to incorporate more diverse assets that have tied their capital so as to back securities that once sold, generates new source of revenue.