Revenue Diversification and Financial Performance of Commercial Banks, Kenya
DOI:
https://doi.org/10.53819/81018102t5322Abstract
Financial intermediaries, providers of funds and primary depositors of savings are important to an economy. In Kenya, the banking sector has been facing challenges such as declining profitability since 2015, with a brief uptick in 2019 that was halted by the COVID-19 pandemic. Banks in Kenya proactively set aside funds to cover potentially risky loans in 2020, reevaluating their asset quality due to the unprecedented uncertainty caused by the pandemic, which put the international financial reporting standard (IFRS) 9 for projected credit loss provisioning to the test. The Kenyan banking sector must overcome various challenges, including economic downturns, illiquid stock markets, and other macroeconomic and bank-specific issues, despite demonstrating resilience and stability with robust capital and liquidity ratios in 2022. Thus this research investigated the effect of income diversification on financial performance of commercial banks in Kenya. Specifically, this research assessed the effect of fees and commissions, dividend income, foreign currency trading and transaction fee revenue on the financial performance of commercial banks in Kenya. The research was based on agency theory, portfolio theory and financial intermediation theory. The sample included 38 commercial banks selected from the years 2019 to 2023, and the research used a census sampling method to gather data from the whole population of these banks in Kenya. The study employed an explanatory research design, utilizing descriptive statistics such as mean and standard deviation, as well as inferential statistical tools like panel multiple regression analysis and Pearson correlation analysis, while various diagnostic tests, including multicollinearity, normalcy, linearity, homoscedasticity, Houseman test, and autocorrelation tests, were conducted to validate the model's predictions. The study found that fees and commission income had a positive and statistically significant relationship with the return on assets (ROA) of commercial banks in Kenya (β=3.085506, p=0.000), and dividend income also showed a strong and statistically significant correlation with ROA (β=1.939443, p=0.000). The p-value for foreign exchange trading income was 0.0050, indicating that it significantly affects the financial performance of commercial banks in Kenya. Furthermore, the p-value for transaction fee income was 0.0240, suggesting that commercial banks in Kenya heavily rely on cash from transaction fees to fund their operations. In conclusion, the research determined that there is a significant positive relationship between fees and commissions, dividend income, foreign exchange trading income, and transaction fee income on the financial performance of commercial banks in Kenya. The study recommended that commercial banks need to review transaction rates from time to time to ensure that they derive maximum income from loans. Further, banks need to participate in the securities market by trading in shares and other investment vehicles to expand their revenue base. Banks can diversify their investment options and focus on foreign exchange trading income since it improves their performance.
Keywords: Commission fees, Dividend income, foreign exchange income, transaction fees income, financial performance, Commercial Banks, Kenya
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