IDEAS home Printed from https://ideas.repec.org/p/zbw/kbawps/2.html
   My bibliography  Save this paper

Income diversification in the banking sector and earnings volatility: Evidence from Kenyan commercial banks

Author

Listed:
  • Kiweu, Josephat Mboya

Abstract

This paper investigates whether diversification of income sources for Kenyan banks leads to better earnings and reduced individual bank and systemic risks. The study seeks to analyze the extent to which observed shift toward fees income generating activities has improved bank performance and reduced volatility of revenue. The findings show that there are few benefits, if any, to be expected from income diversification from traditional banking although there is growing importance of non-interest income during the study period 2000 - 2010. The benefits of the evolution of non-interest income do not seem to fully offset the increase in risk that come with fee based income. A positive correlation between net interest income and non-interest income seems to exist, a finding that suggests that non-interest income may not be used to stabilize total operating income. The findings also reveal that lending rates are significantly correlated with net interest income, and the relationship is negative meaning that more lending takes place when interest rates are favorable.

Suggested Citation

  • Kiweu, Josephat Mboya, 2012. "Income diversification in the banking sector and earnings volatility: Evidence from Kenyan commercial banks," KBA Centre for Research on Financial Markets and Policy Working Paper Series 2, Kenya Bankers Association (KBA).
    • Handle: RePEc:zbw:kbawps:2
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/249503/1/WPS-02.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Stiroh, Kevin J, 2004. "Diversification in Banking: Is Noninterest Income the Answer?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 853-882, October.
    2. Viral V. Acharya & Iftekhar Hasan & Anthony Saunders, 2006. "Should Banks Be Diversified? Evidence from Individual Bank Loan Portfolios," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1355-1412, May.
    3. Hidayat, Wahyu Yuwana & Kakinaka, Makoto & Miyamoto, Hiroaki, 2012. "Bank risk and non-interest income activities in the Indonesian banking industry," Journal of Asian Economics, Elsevier, vol. 23(4), pages 335-343.
    4. Lin, Jane-Raung & Chung, Huimin & Hsieh, Ming-Hsiang & Wu, Soushan, 2012. "The determinants of interest margins and their effect on bank diversification: Evidence from Asian banks," Journal of Financial Stability, Elsevier, vol. 8(2), pages 96-106.
    5. Mercieca, Steve & Schaeck, Klaus & Wolfe, Simon, 2007. "Small European banks: Benefits from diversification?," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1975-1998, July.
    6. Janne Peltoniemi, 2007. "The Benefits of Relationship Banking: Evidence from Small Business Financing in Finland," Journal of Financial Services Research, Springer;Western Finance Association, vol. 31(2), pages 153-171, June.
    7. Baele, Lieven & De Jonghe, Olivier & Vander Vennet, Rudi, 2007. "Does the stock market value bank diversification?," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1999-2023, July.
    8. Busch, Ramona & Kick, Thomas, 2009. "Income diversification in the German banking industry," Discussion Paper Series 2: Banking and Financial Studies 2009,09, Deutsche Bundesbank.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Haykel Zouaoui & Faten Zoghlami, 2023. "What do we know about the impact of income diversification on bank performance? A systematic literature review," Journal of Banking Regulation, Palgrave Macmillan, vol. 24(3), pages 286-309, September.
    2. Ali Osman GURBUZ & Serhat YANIK & Yusuf AYTURK, 2013. "Income Diversification and Bank Performance: Evidence From Turkish Banking Sector," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 7(1), pages 9-29.
    3. Lee, Chien-Chiang & Hsieh, Meng-Fen & Yang, Shih-Jui, 2014. "The relationship between revenue diversification and bank performance: Do financial structures and financial reforms matter?," Japan and the World Economy, Elsevier, vol. 29(C), pages 18-35.
    4. Boubakri, Narjess & Mirzaei, Ali & Samet, Anis, 2017. "National culture and bank performance: Evidence from the recent financial crisis," Journal of Financial Stability, Elsevier, vol. 29(C), pages 36-56.
    5. Jean-Pierre Gueyié & Alaa Guidara & Van Son Lai, 2019. "Banks’ non-traditional activities under regulatory changes: impact on risk, performance and capital adequacy," Applied Economics, Taylor & Francis Journals, vol. 51(29), pages 3184-3197, June.
    6. Li, Li & Zhang, Yu, 2013. "Are there diversification benefits of increasing noninterest income in the Chinese banking industry?," Journal of Empirical Finance, Elsevier, vol. 24(C), pages 151-165.
    7. Sissy, Aisha Mohammed & Amidu, Mohammed & Abor, Joshua Yindenaba, 2017. "The effects of revenue diversification and cross border banking on risk and return of banks in Africa," Research in International Business and Finance, Elsevier, vol. 40(C), pages 1-18.
    8. Westman, Hanna, 2011. "The impact of management and board ownership on profitability in banks with different strategies," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3300-3318.
    9. Căpraru, Bogdan & Ihnatov, Iulian & Pintilie, Nicoleta-Livia, 2020. "Competition and diversification in the European Banking Sector," Research in International Business and Finance, Elsevier, vol. 51(C).
    10. Zouaoui, Haykel & Zoghlami, Feten, 2020. "On the income diversification and bank market power nexus in the MENA countries: Evidence from a GMM panel-VAR approach," Research in International Business and Finance, Elsevier, vol. 52(C).
    11. Yang, Hsin-Feng & Liu, Chih-Liang & Yeutien Chou, Ray, 2020. "Bank diversification and systemic risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 311-326.
    12. Marinelli, Giuseppe & Nobili, Andrea & Palazzo, Francesco, 2022. "The multiple dimensions of bank complexity: Effects on credit risk-taking," Journal of Banking & Finance, Elsevier, vol. 134(C).
    13. Barbara Casu & Panagiotis Dontis†Charitos & Sotiris Staikouras & Jonathan Williams, 2016. "Diversification, Size and Risk: the Case of Bank Acquisitions of Nonbank Financial Firms," European Financial Management, European Financial Management Association, vol. 22(2), pages 235-275, March.
    14. Zhang, Ailian & Wang, Shuyao & Liu, Bai & Fu, Jingyuan, 2020. "The double-edged sword effect of diversified operation on pre- and post-loan risk in the government-led Chinese commercial banks," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    15. Michael Doumpos & Chrysovalantis Gaganis & Fotios Pasiouras, 2016. "Bank Diversification and Overall Financial Strength: International Evidence," Working Papers 1602, University of Crete, Department of Economics.
    16. Jeon, Bang Nam & Wu, Ji & Chen, Limei & Chen, Minghua, 2020. "Diversification, efficiency and risk of banks: New consolidating evidence from emerging economies," School of Economics Working Paper Series 2020-10, LeBow College of Business, Drexel University.
    17. Fan Yang & Tajul Ariffin Masron, 2024. "Does financial inclusion moderate the effect of digital transformation on banks’ proportion of non-interest income in China?," Economic Change and Restructuring, Springer, vol. 57(3), pages 1-24, June.
    18. Minzhi Wu & Emili Tortosa-Ausina, 2020. "Bank Diversification and Focus in Disruptive Times: China, 2007–2018," Working Papers 2020/21, Economics Department, Universitat Jaume I, Castellón (Spain).
    19. Francis, Bill B. & Hasan, Iftekhar & Küllü, A. Melih & Zhou, Mingming, 2018. "Should banks diversify or focus? Know thyself: The role of abilities," Economic Systems, Elsevier, vol. 42(1), pages 106-118.
    20. Shabir, Mohsin & Jiang, Ping & Shahab, Yasir & Wang, Wenhao & Işık, Özcan & Mehroush, Iqra, 2024. "Diversification and bank stability: Role of political instability and climate risk," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 63-92.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:kbawps:2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://www.kba.co.ke/about_research_center.php .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.