Diversification, firm size and competitiveness of commercial banks in Kenya

Abstract

Commercial banks in Kenya have achieved mixed levels of Competitiveness despite each engaging in one form of diversification or the other. It is evident that the banks have established multiple service branches across different geographical locations of Kenya, invested in other asset types besides the loan book and pursued new revenue streams alongside interest. The broad objective of this study was to investigate the effects of diversification on competitiveness of commercial banks in Kenya as moderated by firm size. Specifically, the study was to evaluate, establish and determine the effect of geographical, income and asset diversification, respectively, on Competitiveness of Commercial banks in Kenya. It was also to establish the moderating effect of Firm size on the relationship between diversification and Competitiveness in that context. Competitiveness of the banking sector is a significant study area as it forms part of the key indicators of economic performance of the country. Besides, this, diversification has been touted as a critical avenue for boosting the survival and expansion opportunities of any enterprise. The study was based on Expost Facto research design anchored on a positivist philosophical paradigm. Panel data of the study variables covering a ten-year period from 2009 to 2018 was collected using document analysis guide. Thirty-six commercial banks operating in Kenya out of 42 registered ones were covered. In the study, income and asset diversifications were both measured using adjusted Herfindahl-Hirschman index (HHI). Geographic diversification, firm size and competitiveness were measured using number of branches, natural logarithm of total assets and customer deposits, respectively. Data analysis for both descriptive and inferential statistics was undertaken using EViews Statistical software. Study hypotheses were tested by conducting F test on the models and t tests on the regression outputs. The findings were that both geographic and income diversification had positive and negative statistically significant effect on commercial bank competitiveness respectively, while asset diversification had not. It was concluded that while geographical diversification positively influenced commercial bank competitiveness income diversification had a negative influence. Asset diversification emerged as having no effect on competitiveness, though firm size moderated this relationship significantly. The relationship between geographic diversification and competitiveness was also significantly moderated by firm size. It was recommended that commercial banks in kenya should monitor their market and expand to new geographical locations within the country where unbanked market potential exists. Attempts to diversify income streams by banks leads to reduction of customer deposits and should therefore be avoided. Firm size diminishes the gains of geographic diversification and activates the effects of asset diversification on competitiveness of Kenyan commercial banks.