MODERATING INFLUENCE OF BANK SIZE ON THE RELATIONSHIP BETWEEN LOAN PORTFOLIO AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS

Abstract

This study investigated the moderating influence of bank size on the relationship between loan portfolio composition and financial performance of commercial banks in Kenya over the period 2006–2015. A census of fully operational banks was conducted, combining primary data from key personnel questionnaires with secondary data obtained from audited financial statements. Generalized least squares (GLS) panel regression was used to examine the effects of personal loans, real estate loans, SME loans, and insider loans on financial performance indicators including Return on Assets (ROA), Return on Equity (ROE), and Current Ratio (CR). The unmoderated model showed that insider loans had significant positive effects on ROA (β = 0.512, p = 0.025) and ROE (β = 340.77, p < 0.01), whereas SME and personal loans had weaker and mostly insignificant effects. When bank size was introduced as a moderator, the interaction terms revealed significant moderation effects, including SIL (β = -44.16, p < 0.01) and SRL (β = 7.09, p = 0.046), improving the explanatory power of the models with R² increasing to 61.8% for CR, 3.93% for ROA, and 62.83% for ROE. These findings suggest that larger banks are better positioned to optimize their loan portfolios, enhance profitability, and improve liquidity. The study implies that policymakers and bank managers should consider bank size in lending strategies to improve financial stability and performance.