Effects of Revenue Diversification into Non-Interest Income on Financial Performance of Commercial Banks in Kenya (A Case of Five Most Profitable Banks in Kenya)

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Murithi, James G.
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The growth of non-intermediation income activities suggests intermediation activities are becoming less important part of banking business strategies and strategically, banks have shifted their sales mix by diversifying in income sources. Banks exist to inter-mediate the transactions between demanders and suppliers of money at a given consideration. Earnings from these transactions form banks traditional income generating activities. This study set out to determine the effect of foreign exchange trading, fees and commissions on loans and advances, government securities and sale and lease of assets owned by the banks on the five most profitable commercial banks financial performance. This research adopted an exploratory design where the population of interest was drawn from the five most profitable commercial banks in Kenya; KCB, Equity Bank, Barclays, Standard Chartered and Cooperative Bank. The study focused on the head offices of these commercial banks and particularly on staff that are directly dealing with the day to day management of the banks as well as senior management (directors and general managers) since they are the ones conversant with the effects of income source diversification into non-interest income sources on financial performance of these commercial banks. Stratified random sampling was used to select the sample, taking a sample of 30% from each stratum. The study used both primary data and secondary data. The questionnaires included structured and unstructured questions and was administered through drop and pick method to respondents who were the top, middle and low level managers in the organizations. Data was analysed using descriptive statistics. The Likert scale was used to analyse the mean score and standard deviation, this helped in determining the extent to which the bank uses various income diversification strategies to influence its performance. The researcher further employed a Herfindahl-Hirschman Index to measures the degree of diversification in a bank's net operating revenue. The researcher further employed regression model to study the relationship between the bank financial performance and income diversification into non interest incomes by banks. The study established that all the banks in the study had diversified into noninterest income. It was also established that fees and commissions, foreign exchange, sale and lease of assets owned by commercial banks and government securities influenced financial performance of commercial banks in Kenya.