Banks’ Transactional Based Revenue: a Survey of Commercial Banks in Kenya

Abstract

The survival of banks is pegged on its ability to engage in activities that will result to increase in total operating income (includes both non interest and interest); in terms of attaining profit and cost efficiencies. There has been a need to diversify into the both traditional interest and non-traditional revenue based activities in order to achieve economies of scales and competitive advantage. However, there is still a non-consensus between scholars regarding the impact of transaction based revenue on financial performance of banks. The research sought to establish the trend of transactional based revenue amongst commercial banks of Kenya and to compare between transactional based revenue and net interest income. Descriptive research design was used. The study entailed 34 no. commercial banks in Kenya which were clustered into tiers for comparison and therefore formed unit of analysis across a period of 5 years from 2016-2020. The range of 5 year was chosen since average ratios change over a period of time. The study used secondary data extracted from audited and published books of financial accounts of the 34 commercial banks in Kenya. Data was analyzed using descriptive and inferential statistics. Independent sample t-test was used to compare transaction based revenue and interest based revenue. Descriptive analysis was employed to establish the trends in transaction based revenue. It was presented using table and graphs. The results indicated that there has been fluctuation in transaction based revenue trends especially in tiers 1, 2 and 3 commercial banks in regard to the mean. The overall trends of transactional based revenue increased from 27% in 2016 to 30% in 2020 due to the interest and transaction fee waivers that was passed by CBK and other commercial banks to cushion against impact of Covid 19 pandemic however a peak was recorded in 2019 at 33.0%: The transactional based revenue differ significantly from the interest based revenue, which implies that net interest based revenue was better as compared to transactional based revenue for all commercial banks. However, transaction based income increased from 28% in 2016 to 32% in 2020 while income based revenue decreased from 72% in 2016 to 68% in 2020. It was found that smaller banks are more involved in transactional based earning activities relative to their larger counterparts with tier four banks registering the highest mean difference of 128.9% between 2016 and 2020. Therefore, transaction based revenue increasing trend especially in tiers 3 and 4 is a clear indication that small banks are diversifying their operating income to reduce risks and volatility in their earnings. The study recommended that bank management should ensure that an effective balance is struck between the drive for increasing transaction based revenue and focusing on the core intermediary functions of the banks since it is more beneficial for retail-oriented banks in Kenya to increase their share of transaction based revenue. The fluctuations in transaction based income which is an indication that transaction based income can grow if the government adopts policies that would encourage diversification in other sources of income. A policy that encourages commercial banks to engage in transactional based income activities should also be considered.