The relationship between non interest income and financial performance of commercial banks in Kenya

Abstract

Commercial banks’ lending and deposit-taking business has declined in recent years. Deregulation and new technology have eroded banks’ comparative advantages and made it easier for nonbank competitors to enter these markets. In response, banks have shifted their sales mix toward noninterest income — by selling ‘nonbank’ fee-based financial services such as mutual funds; by charging explicit fees for services that used to be ‘bundled’ together with deposit or loan products; and by adopting securitized lending practices which generate loan origination and servicing fees and reduce the need for deposit financing by moving loans off the books. This study seeks to examine the relationship between non interest income and financial performance of commercial Banks in Kenya. The study used a descriptive research design. The population of this study comprised all the commercial banks. In this study secondary data was used to investigate the relationship between independent and dependent variables. The data was analysed using descriptive analysis, correlation analysis and regression analysis. The study show that that there is no significant increase in profit as the bank invest and diversify to non- interest income. The F statistic was also significant suggesting that the model was fit to explain the relationship. The study concludes that noninterest income has partial significant positive impact on financial performance. The study recommends that in order for the financial performance of commercial bank to improve, the management should not highly depend on non interest income but diversify to other income generating activities