The effect of diaspora banking on financial performance of commercial banks in Kenya

Abstract

Diaspora banking has been coined from the word diaspora to mean provision of banking services to people in the diaspora. Banks fill a market need by providing a service and earn a profit by charging customers for the service. Diaspora Banking leads to enhanced profitability among commercial banks. The study sought to determine the effect of diaspora banking on financial performance of commercial banks in Kenya. The study was based on the theory of financial intermediation and delegated monitoring, theory of information production and the theory of liquidity transformation. Secondary Data was collected from Central Bank and banks financial reports and multiple regression analysis used in the data analysis. The study revealed that there was a strong postive relationship between disapoara banking and financial performance of commercial banks in Kenya. The study also established that diaspora deposits, diaspora loans, real exchange rate, real interest rate and bank size positively influenced the financial performance of commercial banks in Kenya. On the other hand inflation was found to be influencing negatively the financial performance of commercial banks in Kenya. There is need for commercial banks in Kenya to provide more platforms in which people can access diaspora banking service. There is also a need for the central bank of Kenya to institute various monetary policy measures that will help check the country’s inflation rate and to provide enhanced regulation on diaspora banking as this will help in increasing the platform for people to access diaspora banking. The study also recommends that commercial banks in Kenya should have strategies to increase their size as it was found that size of the commercial banks increase their financial performance.