Influence of Diversification on the Financial Performance of Commercial Banks in Kenya

Abstract

Diversification has been found to play an important role in improving the financial performance of commercial banks. However, it has been observed that although most of the commercial banks in Kenya are diversified, they have continuously experienced insignificant growth and unstable financial performance. The poor performance has resulted to some of them being put under receivership and others acquired. The main objective of this study was to determine the influence of diversification on the financial performance of commercial banks in Kenya. The target population consisted of all the 39 commercial banks in Kenya over the period 2011 to 2020. Income and asset diversification were both measured using adjusted Herfindhal-Hirschman index (HHI). Geographical diversification was measured using natural logarithm of number of branches. The t-test was used to determine the significance of the model and also test hypothesis. Data analysis for both descriptive and inferential statistics was undertaken using EViews statistical software. The findings were that income diversification had a significant inverse relationship, geographical diversification had a significant positive influence while asset diversification had no significant influence on financial performance of commercial banks in Kenya. It was recommended that commercial banks in Kenya should not diversify their income streams since it reduces their income. Attempts to diversify their assets should be avoided since it was found to be not statistically significant. There is need for the banks to diversify more geographically by establishing more branches both within and outside the country where unbanked market potential exists.

Keywords: Diversification, Financial Performance, Commercial Banks