The Effects of Income Source Diversification on Financial Performance of Commercial Banks in Kenya

Abstract

This paper attempts to find out the effect of diversifying income sources of Commercial Banks in Kenya during the financial period 2007 – 2011 on financial performance. The study predicts that the level of diversification has a positive impact on financial performance. This study is significant because banks are facing stiff competition from Micro- Finance Institutions and other mobile money transfer services which was in the past a role for banks only. Financial distress in the past has caused many banks to collapse in the past which has impacted negatively on the entire economy of the nation. Commercial Banks have therefore had to diversify their income sources from traditional intermediation income generating activities to non-intermediation income generating activities. The findings of this study conducted on 15 Commercial Banks in Kenya relied on secondary data from annual reports of the banks. Regression analysis was mainly used to reveal that commercial banks in Kenya are diversified in income source generating activities. If banks diversify their income generating activities, the problem of profitability and stiff competition in the industry will ease, hence improving financial performance. The regression analysis conducted established that the independent variables have a positive strong correlation with the dependent variable. Each of the independent variables: interest income, fees and commissions on loans and advances, other fees and commissions, foreign exchange trading income and other non interest income contribute positively to financial performance of commercial banks It is also evident from the study that without the diversification of income sources by commercial banks in Kenya most of them would have struggled with their objectives of maximizing shareholders wealth or eventually collapsed.