An investigation of the effects of income source diversification on 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 purpose of this study was to establish the effects of income source diversification on financial performance of commercial banks in Kenya. The study sought to establish the effects of foreign exchange trading income, bank charges, commission on government securities and agency banking on financial performance of commercial banks in Kenya. The research adopted a descriptive survey research design. The target population was the 43 registered Commercial banks and respondents were the 43 finance mangers at the head offices. Due to the population size of finance managers at the head offices of the 43 registered commercial banks, the research took a census approach. Primary data was obtained through self-administered questionnaires. The researcher used multiple regression model to analyze the relationship between the independent and dependent variables. The findings were presented using tables and figures. The study found that foreign exchange had the highest effect on banks financial performance followed by commission from loans and advances, then government securities while agency banking had the least effect on banks financial performance (r= 0.793, p= 0.0214). A majority of the respondents (70%) indicated that foreign exchange trading affects financial performance of Commercial banks to a great extent. From the findings, exchange rate margins and volume of foreign exchange transactions affected the financial performance of the banks to a great extent as shown by a mean of 3.975 and 3.609 respectively. A majority of the respondents (65%) reported that bank charges affected financial performance of Commercial banks to a great extent. According to the findings, interest rates earned on the loans, credit cards fees and number of loans/advances affected the financial performance of the banks to a great extent as shown with a mean of 3.959, 3.859 and 3.781respectively.From the findings, number of transactions and commission from Agency banking affected the financial performance of the commercial banks with a mean of 3.892 and 3.781 respectively. A conclusion can be drawn from the study that ‘Income source diversification affects financial performance of commercial banks in Kenya’. The banks should increase their foreign exchange trading by increasing volume of foreign exchange transactions, and ensuring that positive trade flows are maintained. Accounts opening fees should be eliminated to attract more customers.Banks should invest on government securities to earn more commission from Treasury Bonds and Treasury Bills to increase their profit.