The Effect of Non-funded Income on the Risk of Commercial Banks in Kenya

Abstract

Non-funded income for banks is measured from activities arising from the revenue generated from various fees charged, penalty charges, the sale of assets, and the leasing of property. Non-funded income is not affected by financial and economic cycles, and in most instances, it is uncontrolled by regulation or laws. The study examined the effect of non-funded interest income on the risk of Kenyan commercial banks. The study adopted a descriptive research design. Kenyan commercial banks were the target population. The study relied on secondary data for its findings. The data was analyzed with the help of SPSS version 24. Non-funded income does contribute to generating the overall profitability of commercial banks due to the effect it has on increasing revenue streams for commercial bank operations. The correlation shows non-funded income and risk had a moderately positive correlation in commercial banks in Kenya as indicated by an r value of 0.609. A strong correlation r= 0.817, was established between the return on assets and capital adequacy. Level of efficiency and bank size were found not to have a correlation with risk of commercial banks. This was indicated by r values of 0.007 and 0.183 respectively. The results underscore the important role played by key risk indicators. The ANOVA analysis showed the independent variables significantly predict risk of commercial banks (dependent variable). This is indicated by F (5, 199) = 10.227, p<0.05. The established causal effect of non-funded income on risk underscores the need by commercial banks to diversify their operations into other non-core business activities as a means of generating more revenue. In order to increase their profitability, it is important for commercial banks to diversify their operations to include non-core activities that contribute to minimizing their levels of risk. This will act as important risk mitigation strategies for commercial operators of banks.