Influence of Income Diversification on Financial Performance of Commercial Banks in Kenya

Kenya's banking sector is vital to the nation's economic development since it acts as a vital intermediary between savers and borrowers. In an attempt to boost their financial performance, Kenyan commercial banks have been diversifying their sources of income, including non-interest and traditional interest income. Supervisory reports from the Central Bank of Kenya show that, despite these efforts, the sector's financial performance steadily worsened between 2013 and 2020, as seen by a declining return on assets. The objective of this study was to determine the effect of income diversification on the financial performance of commercial banks in Kenya. This research was based on the Resource-Based View theory. The study used a longitudinal descriptive research design and embraced a positivist philosophical perspective. Using a census approach, it examined secondary data from each of the 38 commercial banks that were operational in Kenya from 2013 to 2022. The study used the return on assets ratio to gauge financial success and the Hirschman-Herfindahl Index to gauge income diversification. Relationships between variables were examined using panel ordinary least square regression models.The results confirmed a significant positive relationship between bothinterest (β=0.224,p=0.00) andnon-interest(β =0.609,p=0.00)income diversification and financial performance. The study concluded that income diversification enhances financial performance. The study recommends that policymakers implement measures that promote income diversification in the banking industry.