Assessing The Impact Of Non-Interest Income Diversification On Commercial Bank Performance: Case Of Bancabc

ABSTRACT

Introduction: Traditionally, commercial banks generate their profits from the difference between

interest from lending and interest granted to the depositors. However following financial

liberalization, deregulations and increased competition from non-financial intermediaries, banks

have since diversified from their traditional ways of making profits into non-traditional ways/noninterest

income generating activities.

Statement problem: The blurred effects of diversification into non-interest income was revealed

by the end results of Memorandum of Understanding (MoU),banks were regulated to charge

stipulated rates on non-interest income activities namely: cash withdrawals, time deposits, ledger

fees, maintenance and services and automated teller machines transaction charges. This regulatory

policy was followed with mixed results, with some banks recording increased margins of profits;

whilst other banks announcing loses. This brought a perplexing question on how can one well

produce both salt and sweet water? The relationship between profitability and activities generating

non-interest income is not straightforward in sense that the diversification strategy can either

increase profits or end up contributing to operational costs of the bank. This prompted the

researcher to investigate on the impact of non-interest income diversification on commercial bank

performance.

Methodology: The study used a case study mixed research design that incorporated both

qualitative and quantitative analysis. In this study a regression model was used to investigate the

relationship between dependent and independent variables using E-Views 7 a statistical package,

the analysis was done at 95% confidence level. The researcher employed a convenience and

judgmental sampling techniques because the search only targeted acquainted individuals. The

researcher used a coded excel questionnaire that was administered through e-mail to targeted

respondents. The data was analysed using t-statistics analysis, correlation analysis and regression

analysis.

Results: The study established that diversification into non-interest income is associated with

increased commercial bank performance represented by profitability. However the study also

revealed that diversification into non-interest income is allied with increased levels of operational

costs.

Assessing the impact of non-interest income diversification on commercial bank performance:

Case of BancABC.

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Recommendations: The study recommends that banks should treat non-interest income as

complementary income to net interest income but rather not a substitute. Diversification into noninterest

income is a sufficient strategy but not a necessity stratagem to ensure banks survival.