Residential Mortgage Portfolio, Product Innovation and Performance of Commercial Banks in Kenya

This study sought to investigate the relationship between residential mortgage portfolios, product innovation, and performance of commercial banks in Kenya. The study was anchored on the Modern Portfolio Theory, Agency Theory, and Asymmetric Information Theory. The study adopted a correlational descriptive research design and data collected from the annual residential mortgage surveys conducted by the central bank of Kenya (CBK) on commercial banks covering a 13-year period from 2006 to 2018. Further, the financial statements of commercial banks and Kenya Bankers Association database were used as a source of secondary data. Data were analyzed via panel data approaches. The Baron and Kenny (1986) approach was used to test the hypothesis. The results revealed that residential mortgage portfolio attributes, namely: portfolio quality and mortgage interest return significantly influence bank performance. The effect of mortgage terms on the relationship between mortgage portfolio quality and performance was negative and statistically significant. Loan to value (LTV) ratio was however found not to significantly intervene in the relationship between residential mortgage portfolios and the performance of banks operating in Kenya. From the findings, the study suggested that bank managers pay attention to the institutional environment and product characteristics in designing their mortgage loan portfolios.