Factors Influencing Non-interest Income in Commercial Banks in Kenya

Abstract

Bank’s operating income is derived from both interest and non-interest income. Increased non-interest income would improve bank earnings, and also change their output mix, variable. There are various factors that affect non-interest income. They include deregulation, technological development, Bank size and banks’ productivity. The study sought to establish the perceived effect the factors influencing non-interest income in commercial banks in Kenya. The study was guided by the following theories; arbitrage pricing theory and modern portfolio theory. The study employed a descriptive research design. The target population comprised of all the 43 Commercial Banks that have been operating in Kenya. Secondary data was collected from 2012- 2016 audited annual financial reports for individual banks found on the banks website and at the Central Bank of Kenya website and library. Descriptive statistics were used to quantitatively describe the important features of the variables using frequency, mean, maximum, minimum and standard deviation. Regression was used in determining the relationship between government deregulation, bank productivity, technological changes and bank size and non-interest income of banks. The study concludes that government deregulation, significantly and positively related to non-interest income, deregulation enhances competition in the banking sector which will in turn prompt banks to diversify their products (investment in non- interest income) so as to stabilize income. Bank productivity significantly and negatively related to non-interest income, banks liabilities and assets have some output characteristics that result into non-interest income, technological change is positively and significantly related to non-Interest income, investments in technological changes would increase generation of Non-interest income. Bank size (measured total in asset value) is significantly and positively related to non-interest income Banks with high asset value are expected to have higher returns in non-interest income comparison to highly small financial institutions. In this regard, deregulation process should aim at streamlining institutionalization process for higher Non-interest income generation. However, the regulatory authority should come in and homogenize prices of such activities in order to protect bank clients from being exploited. On productivity, Commercial banks in Kenya should keep standard match between overall productivity and Non-interest income estimates. This will help to ensure that productivity does not overturn banks projection on Non-interest income estimates. Government should focus on policy that encourage introduction of low cost advanced technologies in the banking sector. For example policy that encouraged self-service banking. Commercial banks in Kenya should come up with policy that increases diversification and productivity that would assist banks to shift their dependence on interest income and invest in other non-interest income ventures in the long run. To increase sizes commercial banks should come up with a policy that would assist banks expand their activities into different investment ventures and this can be done through investing in financial markets and selling of mutual funds in the market. Policies on diversification should also be put in place by the government to avoid relying on traditional bank activities. A policy that encourages commercial banks to engage in Non-interest income activities