THE INFLUENCE OF FINANCIAL ACTIVITY DIVERSIFICATION ON PROFITABILITY OF COMMERCIAL BANKS IN KENYA

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.