Does Investment Structure Matters in the Nexus Between Income Diversification and Financial Performance in Comesa Region? Evidence from Commercial Banks in Kenya

Abstract

Purpose: The article examines whether investment structure moderates the relationship between income diversification and financial performance of Commercial banks in COMESA region. Approach/Methodology/Design: The study adopted positivist research paradigm and explanatory research design. The data was collected from 31 commercials banks in Kenya from 2008 to 2019.The study considered the following variables: Income Diversification, Investment Structure and Financial Performance. Modern portfolio theory, Agency theory and resource based view theory were adopted. Findings: The study established that income diversification have positive significant effects on the financial performance. The bank investment structure recorded a negative significant effect on financial performance of the commercial banks. Further, the interaction between investment structure and income diversification presented a negative significant effect on financial performance of the commercial banks. The study adds to debate on diversification premiums and discounts by establishing that investment structure moderates the relationship between income diversification and financial performance. COMESA banks have reasons to diversify their income but should consider the mix of the investment structure to achieve optimum results. Practical Implications: Since the study support the benefits of diversification, COMESA as a region can accelerate on pushing for policies that encourage bank diversification to improve the profitability. Additionally, the diversifying banks should optimally adjust their investment structures to propel diversification benefits to compensate the declining interest income. Originality/value: This study contributes to conflicting diversification premiums and discounts by introducing the moderating role of bank investment structure, this indirect effects adds to modern portfolio theory and agency theory that asserts direct relationship of both diversification premiums and discounts respectively.