Abstract:
This paper aims at examining whether the income diversification reduce or increase the financial risks of
the commercial banks in Kenya. Over decades the commercials banks in Kenya have been faced with a
number of risks such as weaker asset quality, increase in non‐performing loans and variability of returns
hence engaging on income diversification as a strategy of mitigating such risks. This study uses a sample
of 31 Kenyan banks and data for the period 2008‐2019. Data is analyzed through random effect regression
analysis. The study finds that income diversification decreases the financial risks. The reduction in financial
risk resulted when the banks manage the agency costs and increase of income from non‐interest activities.
In addition, the key determinants of bank financial risk are; bank size, loan portfolio quality, lending
strategy and market share which recorded a significant effect.
The findings of this study help managers to improve the financial outlook of their banks by pursuing
income diversification in order to reduce financial risk.
