The impact of non-interest income on the earnings volatility of commercial banks in Kenya

Abstract

This research project sought out to determine the relationship between interest income, non-interest income and other incomes of commercial banks in Kenya and the impact of non-interest income on the earnings volatility of commercial banks in Kenya. to achieve these objectives, four regression models were developed using incomes for the period between 1997 and 2001. Trend analysis was also conducted to determine relationships between the three main components of incomes of commercial banks: interest income, non-interest income and other incomes. The study found out that interest income on one hand and non-interest income and other incomes on the other are inversely related to each other. This implies as non-interest income continues to grow, interest income will continue to shrink and in the long run, interest income will no longer dominate bank revenue. This means banking will have completely shifted away from traditional intermediation role. The study results also establishes that increase in the relative contribution of non-interest income to the total income, an ongoing trend that may be strengthened by the recent financial modernization, is associated with both higher earnings volatility and greater profitability. The increase in profitability reflects an increase in the risk premium as the banks become more risky (Increase in the earnings volatility