Effects of Income Diversification and Financial Performance of Kenyan Commercial Banks.

Abstract

This paper aims at examining the impact of income diversification on financial performance. The motivating factor is an occasion by raising pursuance of interest activities and fluctuations of profitability among banks due to the declining interest income and stiff competition. Design/methodology/approach – This study uses a sample of 31 Kenyan banks and data for the period 2008-2019. Data is analyzed through fixed-effect regression analysis. Findings – The study finds that income diversification improves bank profitability. The findings are attributable to an increase in non-interest income and possible risk diversification. Moreover, the study controls for several banking sector-specific factors that affect financial performance. The results show bank size, age, loan portfolio quality, lending strategy, and market share have a significant effect. Research implications – Based on the results, the study recommends that bank managers should consider engaging in non-traditional activities that generate non-interest income to compensate for deteriorating interest income and to boost performance. In addition, the study recommends that bank regulators should relax rules that limit the extent to which banks can engage in non-interest earning activities