Factors That Determine Fee-based Income Of Commercial Banks In Kenya

Abstract

This study sought to identify the factors that determine trends in the commercial banks' fee based income. Whilst some studies have been carried out on risk diversification and non-interest income in the Kenyan banking sector, there has been insufficient information on the factors that affect fees and commissions charged by commercial banks. This study identified four factors as having a significant influence over fees and commissions. These are market share, investment in technology and other assets, cost of service and risk. To facilitate in explaining the changes in the fees and commissions with that of the factors identified, regression analysis was used. Data of a five-year period between 1999 and 2003 was employed to form an equation after which market share was identified as the most important factor in determining fees and commissions. Two other factors namely investment in technology and other assets and cost of service were found to be important in only two of the five years of analysis. Investment in technology was found to have positive relationship with fees and commissions in 2001 and a negative relationship in 2003. These mixed results could be interpreted to mean that while technology and other assets cost banks a great deal, they also result to significant savings on part of the banks. The impact of additional cost and savings probably cancel out and the customer neither benefits from investment in technology and other assets nor suffers from the cost of the technology and other assets. Cost of service had a positive relationship with fees and commissions in 1999, but it did not have a statistically significant relationship between 2000 and 2002 and had a strong positive relationship in 2003. This could be interpreted to mean that by 2003, cost of service had become an important determinant of fees and commissions charged by banks in Kenya. Risk did not have a significant relationship with fees and commissions in any of the five years of analysis.