Competition And Revenue Diversification:An Empirical Analysis Of The Kenyan Commercial Banking Industry

Banks operate in a strictly regulated and dynamic environment where opportunities and challenges arise in equal measure.The dynamic and highly competitive environment has seen a number of Kenyan banks fail,being placed under-receivership,whereas others register exceptional profits year on year.The motivation behind banks seeking to diversify their revenue is brought about by the volatility nature of traditional revenue sources and competition pressure.Hence,Kenyan banks have ventured into non-core banking activities in order to compete adequately,boost profit margins and some cases to survive.Structural changes and innovative products have made it easy for Kenyan banks to diversify.As a result,the interaction between bank competition and revenue diversification is said to have brought about unintended impact on market power;creating uneven competitive environment and banking system stability.Thus,this poses the questions does an empirical relationship exist between bank competition and revenue diversification?And does the interaction between bank competition and revenue diversification in the Kenyan commercial banking sector support competition stability hypothesis?To address the above concerns,a dynamic panel data set of 30 commercial banks from Kenya is used for the period 2007-2016.This study uses two-step GMM to run a dynamic model to determine the interaction between bank competition using Boone indicator and non-interest income to total revenue ratio as a proxy for revenue diversification.The findings show that there exists is a positive and significant interaction between bank competition and revenue diversification.Implication of the findings is that Kenyan banking institutions reap benefits of diversification in terms of increase in competitive advantage.Due to reverse causality,banks that gain competitive advantage over their peers end up earning higher share of non-fund income.Moreover,there exists a linear relationship between competition and revenue diversification in Kenya,in that,when banks record an increase in diversified revenue so does its competition degree increases.Additionally,the positive interaction between bank competition and revenue diversification lends support to competition stability'hypothesis.Robustness check confirms these findings.The above findings have profound implications for banking strategies.