The relationship between non interest income and financial performance of commercial banks in kenya

Abstract

The objective of the study was to establish the relationship between the noninterest income and the financial performances of commercial banks in Kenya. Banks have a vital function in the economy. Traditionally banks have been thought of as firms which take deposits and make loans, and profit by the difference between the costs of the former and the earnings from the latter activities. Commercial banks in Kenya have experienced significant new competition and have lost valuable regulatory protection. Non-interest income have been used as a form of diversification due to the changing levels of competition, economical situations, and changes in technological innovation in the banking sector. Advances in information and communications technology (for example, the Internet and Automatic Telling Machines (ATMs),new intermediation technologies for processes like loan securitization and credit scoring, and the introduction and expansion of financial instruments and markets (high yield bonds, commercial paper, financial derivatives) all impacted on the levels and types of non-interest income at commercial banks. The study used a descriptive research design. The population of the study was 42 commercial banks operating between 2010-2014.The data was analyzed using SPSS version 20 and descriptive analysis, correlation analysis, ANOVA tables and regression analysis obtained. The study shows that there was a negative relationship between increase in non-interest income and financial performance occasioned by the variability in the ratio of non-interest income and net interest income. The p-values indicated significance levels of non-interest income in regression model though negative. The study concludes that non-interest income contributes positively to the financial performance of commercial banks though it diminishes ratio when compared with net interest income and volatility of returns. The study recommends that when numerous non-interest income activities are well managed, will lead to improved financial performance and mitigate banks against volatility of earning in long run. This may be attributed to stability of earning provision of product and services based on relationship banking.