Corporate diversification, firm size and performance of Commercial Banks in Kenya

Abstract

This study sought to establish the effect of size on the relationship between corporate diversification and performance of commercial banks in Kenya. Specifically, the study sought to; determine the effect of corporate diversification on performance of commercial banks in Kenya, investigate the effect of performance on corporate diversification among commercial banks in Kenya, examine the effect of size on the relationship between corporate diversification and performance of commercial banks in Kenya, establish the combined effect of corporate diversification and firm size on performance of commercial banks in Kenya. Herfindahl Hirschman Index was used to measure interest income and non-interest income diversification and natural log of number of branches was used to measure geographic diversification. Bank performance was measured in terms of operating efficiency using the data envelopment approach comparing operational expenses and net income. Bank size was measured in terms of natural log of total assets. Correlation and regression analysis variants were used in analysis of the data. From the eight study sub hypotheses, the study found statistically significant positive relationships between efficiency on one hand and interest income diversification as well as branch diversification on another hand. Non-statistically significant negative relationships were established between efficiency on one hand and branch network diversification as well as the interaction term of size and branch diversification on another hand. Non-statistically significant positive relationships were established between non-interest income diversification and efficiency, performance and interest income diversification, performance and non-interest income diversification. The study findings contribute to the pool of literature, which has over the years demonstrated that there exists a positive direct linear relationship between revenue diversification and financial performance. This is the first study ever to decompose corporate diversification into interest income diversification, non-interest income diversification and branch diversification while lagging the predictor variables to an optimum five year lag in Kenya, using a data envelopment analysis approach and the Herfindahl Hirschman Index. On future research directions, there is a need to undertake a study on internal and external factors which influence levels of diversification and financial performance among financial institutions across geographical locations, financial product lines and non-financial institutions while taking cognizance of the organizations’ motives and ownership structures.