Abstract:
Commercial banks have in the recent past been recording fluctuating profits. In the wake
of the hitherto unstable profitability posted by these banks in Kenya, they have
diversified their financial activities beyond the current banking scope. The general
objective of this study was to determine the influence of financial activity diversification
on profitability of commercial banks in Nakuru town, Kenya. Particularly, the study
examined the influence of revenue diversification, investment diversification and capital
structure diversification on banks’ profitability. The research was guided by both the
modern portfolio and agency theories. A descriptive research design was adopted. The
study population constituted 38 branch managers working with commercial banks
operating in Nakuru town. A census design was adopted where all members of the study
population constituted the unit of analysis and that of observation. A structured
questionnaire was used to collect primary data from the respondents. The questionnaire
was subjected to a pilot study before it was used to facilitate collection of data for the
main study. The Statistical Package for Social Sciences was used to analyze data.
Descriptive and inferential statistics were used in the analysis. The null hypotheses were
tested at p-value = 0.05. The results of the analyses were presented in tables. Whereas
investment diversification (r = 0.442; p = 0.035) and capital structure diversification (r =
0.527; p = 0.010) were found to relate with profitability significantly, the relationship
between revenue diversification and profitability (r = 0.209; p = 0.339) was not
statistically significant at p-value = 0.05. The financial activity diversification explained
33.1% of variability in profitability of commercial banks. Capital structure
diversification was established to be the most important at influencing profitability of
banks. All the three null hypotheses were not rejected’ instead they were deemed to be
true. It was concluded that revenue diversification, investment diversification and capital
structure diversification enabled the banks to increase their profitability albeit
insignifiant. Given that none of the various types of financial activity diversification was
found to be significant, and that when combined they were statistically significant (F3, 19
= 3.133; p = 0.05), the study recommended that commercial banks should consider
embracing and implementing all the financial activity diversification in order to enhance
their profitability.
