Asset Quality and Market Capitalization of Commercial Banks Listed at the Nairobi Securities Exchange, Kenya

Purpose: Commercial banks listed on the NSE have recorded fluctuating market capitalization over the past decade, raising concerns over their solvency and long-term viability. From 2013 to 2024, ROA declined from 4.8% to 3.7%, while ROE fell from 33% to 22%, indicating inconsistent bank performance. Fluctuations in these metrics, including a ROE low of 23% in 2020 and a recovery to 28% in 2022, weaken investor confidence and reduce market efficiency. The objective of the study was to establish the effect of asset quality on the market capitalization of commercial banks listed at the Nairobi Securities Exchange. The theoretical foundation was grounded in Portfolio Methodology: Theory. This study adopted a causal research design. The target population for this study consists of all 11 commercial banks listed on the Nairobi Securities Exchange from 2018 to 2024. Since the population is fairly small, below 100, a census method was employed. The study used secondary data collected using a secondary data collection schedule. The data was analyzed using both descriptive and inferential analysis. Descriptive statistics involved determining the mean, the standard deviation, skewness, and kurtosis of each variable under study. The data was analyzed using panel data techniques, which are particularly suitable for handling data that involves multiple entities over several time periods. STATA 15 was employed for data analysis purposes. Findings: The study established that asset quality significantly influences market capitalization of commercial banks listed at the NSE by explaining 63.38 % of the bank variations in market capitalization. The findings conclude that asset quality is a critical determinant of market capitalization, enhancing investor confidence, stability, and long-term market performance of banks. Unique Contribution to Theory, Practice and Policy: The study recommends that commercial banks strengthen asset quality through effective management of non-performing loans. Regulators should also encourage prudent risk management practices. These strategies will improve investor confidence, stabilize earnings, and significantly boost market capitalization at the NSE.