Revenue Diversification and Financial Performance of Commercial Banks in Kenya

Abstract

Global market technologies and macroeconomic pressure has pushed economies in the world into liberalization and deregulation of their banking industries. The pressure has triggered enormous diversification in commercial banking across the world. However, the effects of the diversification on the profitability of the commercial banks vary. This study was conducted with the aim of establishing relationship between income diversification and the financial performance of commercial banks in Kenya. The study embraced a descriptive research design employing correlational approach in a time series manner. The target population was the 42 commercial banks operating in Kenya for the time between 2011 and 2016. Historical secondary data were collected from the audited annual reports of the commercial banks in the sample. Regression analysis was used to establish the relationship between return on total assets which was the dependent variable and the revenue diversification which was the independent variable. Results of the study indicate that the return on assets for all the banks improved from 2011 to 2013, and later decreased drastically till 2016. This was the similar case for NON/NOI and revenue diversification. However, NIT/NOI was lowest in 2013 and highest in 2015. The study concluded that the diversification had a positive effect on returns on assets. The study therefore recommended more diversification into the non-interest business given that the interest source seems to be getting saturated due to the limits being put forth by the Kenyan government in addition to competition arising from the rising importance of non-bank sources of finance for the households. Banks should focus in widening their non-interest income by improving their focus on income derived primarily from sources such as deposit fees, transaction fees and insufficient funds fees. Banks can also create products that are built around annual fees, account service charges, account inactivity fees, check and deposit slip fees, and such other types of fees.