Diversification, firm size and the financial performance of Commercial banks in Kenya

Abstract

This study explored the effects of diversification strategies on the financial performance of commercial banks in Kenya, focusing on how these strategies help banks manage risk, seize new opportunities and enhance profitability. The study objectives included the study of the effect of income diversification, geographical diversification, product diversification, and the moderating effect of firm size on the financial performance of commercial banks in Kenya. The theoretical foundation of this study was based on Modern Portfolio Theory (MPT) and the Resource-Based View (RBV). The study employed a mixed-methods research design, integrating both quantitative and qualitative approaches. Quantitative data were collected from the annual financial reports of selected Kenyan commercial banks over five years. This data was analyzed using descriptive and regression analysis to investigate the relationship between diversification strategies and financial performance. indicators. Diagnostic tests of multicollinearity, normality, and heteroskedasticity confirmed the reliability and validity of the collected data. The descriptive statistics revealed the suitability of the sampled respondents. The inferential analysis demonstrated that income diversification, geographical diversification, and product diversification have varying positive and significant relationships with the financial performance of banks, with all four variables having p-values less than 0.05. Additionally, the moderating variable of firm size also demonstrated a significant relationship with the variables. The coefficient of determination, R2, was 0.986, which indicates that the estimated regression equation can predict 98.6% of the variation. The adjusted R2 was 0.986, which tells us there was a 98.6% variation in the financial performance of the commercial banks due to changes in income diversification, geographical diversification, and product diversification. This suggests that factors other than those under investigation account for 1.4% of the variation in the commercial banks' company sizes. The research recommends that commercial banks should strive to give top priority to integrating and utilizing diversification products, such as income diversification, geographical diversification, and product diversification, to improve the financial performance and profitability of commercial banks in Kenya. The study suggests that research on other determinants of diversification should be revisited to evaluate their effects on corporate performance and profitability in banks.