Income Diversification and Performance: Should banks trade

The global banking sector continues to grapple with increasing nonperforming loans, unprecedented growth in financial innovations and competition which have distorted interest income stream. In response, banks are now searching for innovative income generating avenues to as a survival strategy. The portfolio theory conjectures that income diversification reduces income volatility and improves profitability. However extant literature shows mixed results. It’s from this background the study sought to investigate the effect of income diversification on bank performance.  Using 310 annual observations drawn from 31 Kenyan commercial banks for the period 2008–2017, the study found that income diversification had a positive and significant effect on bank performance. Therefore, commercial banks are advised to consider diversifying in non-lending activities to better their financial performance. In view of this, the study has implications for bank regulators, scholars and practitioners.