The Relationship Between Product Diversification and Financial Performance of Commercial Banks in Kenya
Abstract
The profitability of commercial banks depends heavily on the net of income generating
activities and the related activities’ expense. Due to the problem of profitability and stiff
competition in the industry, commercial banks have changed their behavior of income
sources, by increasingly diversifying into non-intermediation income generating activities as
opposed to the traditional inter-mediation income generating activities. The objective of this
study was to establish the relationship between product diversification and financial
performance of commercial banks in Kenya. This has been achieved through: establishing the
level of income source diversification of commercial banks in Kenya and establish whether
product diversification improves financial position of commercial banks. This was a census
study of all registered 43 commercial banks in Kenya and relied heavily on documentary
secondary data for 5 year study period (2008-2012). Herfindahl-Hirschman Index,
Correlations and Regression analysis were mainly used and revealed on aggregate that all
commercial banks in Kenya are diversified with large banks in lead while Islamic banks trail.
Further, diversification level has a positive influence on financial performance of commercial
banks in Kenyan. This study recommended that banks should extend their product mixes to
increase profitability through combination of traditional intermediation activities and non
interest activities. The study recommends that a similar study should be carried out across
East Africa and beyond and see whether the same results would be replicated
Citation
A Research Project Submitted In Partial Fulfillment Of The Requirement For The Award Of The Degree Of Master Of Business Administration School Of Business, University Of NairobiPublisher
University of Nairobi School of Business