EFFECT OF TAXATION AND PORTFOLIO STRUCTURE ON PORTFOLIO INCOME: A CASE OF NATIONAL BANK OF KENYA

Abstract

At the heart of portfolio planning is portfolio incomes which are basically determined by portfolio capital and the tax impact. The need to hold portfolios by doing portfolio analysis to take account the scarce resource of capital and the nature of taxes. The Bank has major investments in five portfolios that include; Cash and Cash equivalents, Loans and Advances, Government Securities, Foreign Exchange and Rental Income. The study aimed to evaluate the effect of taxation on portfolio income, examine the effect of capital on portfolio income and assess the simultaneous effect of tax and capital on portfolio income of the Commercial Banks. The study was guided by Arbitrage Pricing Models, Modern Portfolio Theory, Optimal Taxation Theory and Static Trade-off Model. The study used descriptive research design. The data were extracted from the Annual Financial Reports for the years 2009 to 2013. The data extracted were quantitative in nature. This study employed the use of data tables to extract secondary data from the Annual Financial Reports. Data collected was analyzed using Linear and multiple regression analysis. In addition correlation analysis was employed to show the association among the income, tax and capital. Findings showed that tax has a negative and significant effect on income with a beta value of β1 = -0.15 (p-value = 0.012 which is less than α = 0.05). The findings also showed that the standardized coefficient beta and p value of capital were positive and significant (beta = 0.940, p < 0.05). Also, for each unit increase in capital, there is 0.940 unit increases in income. The study concludes that taxes reduce portfolio income while capital does not have an effect on income. The Commercial Banks should invest in tax efficient assets that have optimal taxes and optimal capital employment.