THE EFFECT OF REVENUE DIVERSIFICATION ON RETURN ON ASSETS OF COMMERCIAL BANKS IN KENYA

Abstract

Commercial banks are profit maximizers and perceive revenue diversification as one of
the alternative strategies to cushion and stabilize stakeholder’s returns. This paper
examines whether the diversification level in interest and non-interest revenue affects
return on assets of commercial banks in Kenya. It used unbalanced panel dataset
sourced from 42 commercial banks spanning 2009 to 2018. The paper measured
diversification level using Hirschman-Herfindahl index and captured return on assets
using earnings before interest over total assets. The resources based theory anchors the
study and evaluated the direction and magnitude of the relationship between the
variables using panel data regression. The correlation analyses revealed a moderate
diversification level for both interest and non-interest income. Further, the inferential
random-effect results indicated that return on assets related positively with both interest
and non-interest diversification. The paper recommends a policy framework that allows
banks to engage in various interest-bearing activities to maximize the bank’s return on
assets.