Off-balance sheet activities, bank size and financial perfomance Of commercial banks listed on Nairobi securities exchange in Kenya

Abstract

Kenyan commercial banks occupy a central position in the country’s financial ecosystem, facilitating market guarantees, capital mobilization, and economic development through regulated and inclusive financial intermediation. Off-balance sheet activities, have been associated with financial performance in different contexts. Therefore, this study seeks to address the existing gap in empirical literature by investigating the manner in which off-balance sheet activities relate to commercial banks listed on NSE in Kenya, The specific objectives were; to find out the effect of trade finance, guarantees, and letters of credit on performance of publicly listed banks in Kenya, and to establish the moderating effect of bank size on the effects between off-balance sheet activities and the commercial banks listed on NSE in Kenya. The theories anchoring the study included; Resource-Based View, Capital Asset Pricing Model as well as the Signalling Theory in addition to the Concentration–Fragility Theory. In the research, causal research design was employed based on panel approach, The research targeted the 11 publicly listed banks in Kenya from the year 2015 to 2024 To facilitate systematic data gathering, a structured data extraction sheet was designed to capture the relevant variables from the secondary sources. Descriptive statistics were utilized to summarize the data, which was presented on frequency tables. Using a Dynamic Panel-Data regression model, at 5% significance level, a model was obtained to predict financial performance of the banks in terms of Off-balance sheet activities. The data was tested for diagnostic tests, which included normality as well as multicollinearity together with heteroscedasticity in addition to autocorrelation, stationary and Hausman Test. The research ethically conducted through adhering to the highest standards of academic integrity and ethical research practice. The study concludes that; trade finance plays a significant positive role the financial performance of commercial banks listed on the NSE, guarantees have a positive and significant effect on bank financial performance, , and letters of credit also positively affect bank financial performance, which confirms that these off-balance sheet instruments are valuable tools to enhance profitability and support banking operations. The study reveals that bank size has positive effects on financial performance independently though it does not play a moderating role on the OBS-performance link. Based on the findings, the research recommends that publicly listed commercial banks should; strategically expand their trade finance offerings, focus on tailoring guarantee products to match client needs, strengthen their letters of credit services, particularly for clients engaged in international trade or corporate financing, as LCs improve profitability and support liquidity management. Policy guidance could focus on providing frameworks that enable smaller banks to participate in OBS activities without disproportionate risk exposure.