INVESTMENT DIVERSIFICATION AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS LISTED AT NAIROBI SECURITIES EXCHANGE

Abstract

This study examined the effect of investment diversification on profitability of listed commercial banks in Kenya. Portfolio theory (in regards to Mutual funds), Capital Asset Pricing Model (Real Estate Investments), Q theory of investment (Investment in government securities) and Keynesian Theory of investment (Investment in shares) informed the study. The study adopted a casual research design approach where the target population was based on 11 commercial banks listed at Nairobi Securities Exchange. This study covered a 5-year period from 2018 to 2022. The study used secondary data that was extracted from the websites of the respective commercial banks listed at Nairobi Securities Exchange. Both descriptive and inferential statistics was computed using STATA 15. Descriptive statistics included mean, standard deviation, Maximum and minimum. Inferential analysis included Pearson correlation and linear regression analyses. The study used panel regression analytical model. This study conducted serial correlation tests, heteroscedasticity tests and multicollinearity test to evaluate the data collected before the actual analysis. findings revealed that investment diversification has positive effect on financial performance of commercial banks listed at Nairobi Securities Exchange. Investment in mutual funds, real estate and shares were found to have significant effect on financial performance and they explained up to 64.73% of the variation. In this regard, the study concluded that investment diversification has positive effect on financial performance of commercial banks listed at Nairobi Securities Exchange. The study therefore recommended management should compare each of the mutual fund options basing on desired risk, interest rate, and tenure, and choose a fixed deposit only after weighing the benefits and drawbacks of various mutual funds on the market. The management of the commercial banks listed at Nairobi Securities Exchange should strive to improve the financial performance of their banks through investment in shares preferably, preference shares. High liquidity produced by commercial banks listed at Nairobi Securities Exchange’s client deposits should be invested in a variety of government securities and bonds, which are backed by the government, the study suggested. Key Words: Mutual Funds, Investment in Shares, Government Securities, Real Estate Investment CITATION : Majengo, J. A., Otinga, H., & Miroga, J. (2023). Investment diversification and financial performance of commercial banks listed at Nairobi Securities Exchange. The Strategic Journal of Business & Change Management, 10 (4), 48 – 67. http://dx.doi.org/10.61426/sjbcm.v10i4.2734