dc.description.abstract | Financial institutions generate increased portion of their income from non-intermediation
activities (DeYoung & Rice, 2004) and this could be associated to financial liberalization
policies. Commercial banks exist to inter-mediate the transactions between demanders and
suppliers of money at a given consideration. Earnings from these transactions form commercial
banks traditional income generating activities. However, critical analysis of financial statements
for commercial banks reveal a different trend, where over 40% of their net operating income
comes from non-intermediation income generating activities (Stiroh, 2004a). By engaging in
these non-interest sources, banks have been able to diversify their income source. Shaped by
structural forces of change, banking in emerging markets has recently experienced a decline in
its traditional activities, leading banks to diversify into new business strategies. Generally, it is
believed that diversification of income sources should reduce total risk, as diversification should
stabilize operating income if income streams are negatively or imperfectly correlated. Financial
performance of an organisation is of utmost importance in determining its success. The objective
of this study was to establish the effects of revenue diversification into non-interest income on
financial performance of commercial banks in Kenya. This research adopted descriptive design
as the information was collected from secondary sources. The population of interest was drawn
from the commercial banks in Kenya for the period 2008 to 2012. In pursuance of the objective
of the study, the study sampled 6 largest (most profitable) commercial banks in Kenya in terms
of market share. The study used secondary data which was collected using audited financial
statements of commercial banks in Kenya. Both descriptive and inferential statistics were used
with the aid of Statistical Package for Social Science (SPSS) programme at 95% confidence
level. The researcher employed regression model to study the relationship between the
commercial banks financial performance and income diversification into non-interest incomes by
banks. HHI was used to measure diversification while bank performance was measured by ROA.
The study utilized chi-square test in testing the significance of variables in the study which
showed significant relationship of variables with financial performance of commercial banks.
According to the results, each of the independent variables which are fees and commissions on
loans and advances, foreign exchange earnings, government securities income and sales and
lease of assets income contribute positively to financial performance of commercial banks in
Kenya. It is evident from the study that without diversification of income sources by commercial
banks in Kenya most of them would have struggled with their objective of maximizing profit.
The study recommends that CBK should offer environment where the commercial banks
operations are not interfered with so as to attain diversification of income sources.The study
recommends another study be done to establish the other non-interest incomes that the banks
diversified into that influenced financial performance of the commercial banks in Kenya. Further
research to augment the study findings on the sustainability of each of the non-interest income
source could add value to the profitability of commercial banks and academic literature. | en |