Download This PaperIncome Stream Diversification and Financial Performance of Commercial Banks in Kenya
American Based Research Journal, Vol. 8 Issue 11, November 2019
15 Pages Posted: 26 May 2020
Date Written: November 1, 2019
Abstract
Banks have resulted in strengthening their portfolio mix by diversifying their portfolios in order to eliminate risks, increase their revenue sources, remain profitable and survive the competitive environment. Diversification being the main challenge encountered by banks aims at minimizing the variability of operations by banks by reducing the concentration of deposits, loans and revenue that is generated from these activities. Income diversification aims at increasing the sources of interest as well as non- interest income, reduce interest rate risk and total unsystematic risk. Capping of rates of interest has been judged to be a threat to performance of the banking institutions in Kenya and thus a need for commercial banking institutions to strengthen by diversification their streams of income. The 43 commercial banking institutions having official license from CBK by December 2017 were the target population of this study. The study analyzed Time Series Cross Sectional unbalanced secondary panel data obtained from KNBS, World Bank website, CBK, published financial accounts statements of all the 43 commercial banking institutions in Kenya, and the Banking survey publications for fifteen years ranging from 2002 to 2017. Four hypotheses were estimated using techniques of Panel data by adoption of fixed effects and random effects. Generalized Method of Moments (GMM) was used to estimate short run model. Income streams diversification had an association that was significantly positive on financial performance of commercial banking institutions in Kenya.
Keywords: Portfolio Diversification; Income Streams; Multiple Linear Regressions; Dynamic Panel Model; Fixed Effects
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