Income diversification and its effect on financial performance of listed banks in Kenya
Date
2020
Authors
Nzive, Gloria Wanza
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
This study aims to investigate the effect of income diversification on bank performance
during the period 2012-2018. Financial performance was evaluated based on bank
profitability and solvency. A descriptive research design was used. Secondary data
was collected from the Central Bank Website, the NSE and the respective websites of
the banks. The fixed effect and random effects models for panel data were used to
study the relationship. The Herfindahl-Hirshman Index was used as a measure for
income diversification. Profitability was measured by ROA and ROE. Solvency was
measured by capital adequacy and asset quality. The statistical significance of each
independent variable was tested by performing at-test at 5% level of significance. The
explanatory variable explanatory power was evaluated using the coefficient of
determination, R2
. Based on the fixed effect modelS, income diversification has a
negative impact on profitability measured by both ROA and ROE. The effect is
significant for ROA but is insignificant on ROE. As for solvency, random effect
models reveal that income diversification has a positive effect on bank solvency as
measures by capital adequacy and asset quality. The effect is significant for capital
adequacy but is insignificant for asset quality. The study concluded that income
diversification has a negative effect on probability and a positive effect on solvency.
It is therefore recommended for banks to commit their resources to expand their noninterest
income revenue streams if they want to improve their solvency levels.
However, it should be done with caution as it may be at the expense of profitability.
Description
Submitted in partial fulfilment of the requirements for the Degree of Bachelor of Business Science in Finance at Strathmore University