The Relationship Between Product Diversification and Financial Performance of Commercial Banks in Kenya

Abstract

The profitability of commercial banks depends heavily on the net of income generating activities and the related activities’ expense. Due to the problem of profitability and stiff competition in the industry, commercial banks have changed their behavior of income sources, by increasingly diversifying into non-intermediation income generating activities as opposed to the traditional inter-mediation income generating activities. The objective of this study was to establish the relationship between product diversification and financial performance of commercial banks in Kenya. This has been achieved through: establishing the level of income source diversification of commercial banks in Kenya and establish whether product diversification improves financial position of commercial banks. This was a census study of all registered 43 commercial banks in Kenya and relied heavily on documentary secondary data for 5 year study period (2008-2012). Herfindahl-Hirschman Index, Correlations and Regression analysis were mainly used and revealed on aggregate that all commercial banks in Kenya are diversified with large banks in lead while Islamic banks trail. Further, diversification level has a positive influence on financial performance of commercial banks in Kenyan. This study recommended that banks should extend their product mixes to increase profitability through combination of traditional intermediation activities and non interest activities. The study recommends that a similar study should be carried out across East Africa and beyond and see whether the same results would be replicated