Non-Interest Income and Insolvency Risk of Commercial Banks in Kenya

Abstract

Guaranteeing the robustness of commercial banks is critical to the development of any economy as they allocate resources toward productive activities. In recent years, the sector has witnessed the collapse of banks. This trajectory of insolvent of banks has resulted in decreased lending to the private sector and increased merger and acquisition activities, predominantly of banks facing financial distress. Loan disbursement has remained the major source of revenue for banks. However, recent trends indicate non-interest income activities have grown steadily, necessitating the need to understand the effect on insolvency risk. Thus, the study sought to determine the effect of non-interest income on commercial banks' insolvency risk in Kenya. The study period was between 2012 and 2019. A census was adopted (all 40 banks were included in the study). The study adopted a causal research design. The result of the study showed that fees and commission income on loans had a positive and significant effect on insolvency risk as measured by the z-score. Furthermore, foreign exchange income had a positive and significant impact on insolvency risk. Dividend income was positively and significantly related to insolvency risk. Moreover, transaction income had a positive and significant influence on insolvency risk. Bank characteristics was found to be a good moderator. The study recommended that commercial banks expand their non-interest income sources as they positively influence a bank’s risk of insolvency.