EFFECT OF BANK SIZE ON THE RELATIONSHIP BETWEEN REVENUE DIVERSIFICATION AND PERFORMANCE OF COMMERCIAL BANKS IN KENYA

Teimet, P. R; Lishenga, L. J.; Iraya, M. C.; Ochieng, D. E.

Teimet, P. R
Lishenga, L. J. Professor, University of Nairobi, School of Business, Department of Finance and Accounting
Iraya, M. C. Professor, University of Nairobi, School of Business, Department of Finance and Accounting
Ochieng, D. E. Lecturer, University of Nairobi, School of Business, Department of Finance and Accounting

Abstract

Abstract

Purpose: The purpose of the study was to establish the moderation effect of firm size on the relationship between revenue diversification and performance of commercial banks in Kenya.

Methodology: The paper used unbalanced panel data sourced from Kenya’s central bank spanning 2009 to 2018, across 42 commercial banks. Hirschman-Herfindahl model captured the diversification index while return on assets was captured using earnings before interest and tax, over assets. Bank size was proxied using regulatory weighted composite index while the moderation effect was assessed using Baron-Kenny’s model.

Findings: The study found that the bank size interaction with interest diversification was insignificant (β₃ = .049, P = .836), meaning the absence of moderation effect. Further, the bank size interaction with non-interest diversification was significant (β₃ = -.69, P = .0218), meaning the presence of moderation effect. The results implied that bank size does not moderate the relationship between interest diversification and return on assets; however, moderates the relationship between non-interest diversification and return on assets

Implication: The results imply that commercial banks need to step-up their size scale as a mechanism to achieve banks activities’ and diversification strategies to improve returns. The size of a bank is an indication of bank’s reliance on collected deposits as well as gaining a competitive edge by leveraging on average cost reduction per-unit while enhancing capital base and market share, which ultimately is geared towards withstanding financial shocks.

Value: The study adds value to the banking regulators and managers in understanding the influence of bank size and provides a profound pointer in the bank’s management and intermediation decision. A supervisory body finds the current study findings useful while undertaking superintendent starring role and production of prudential guiding principle to guide banks on revenue generation activities as well as restriction of banking activities.