Influence of Investment Diversification on Profitability of Commercial Banks in Nakuru Town, Kenya

Abstract

Background: Commercial banks have in the recent past been recording fluctuating profits. In the wake of the hitherto unstable profitability posted by these banks in Kenya, they have diversified their financial activities beyond the hitherto banking scope. The objective of this article was to determine the influence of investment diversification on banks’ profitability. The research was guided by both the resource dependency and agency theories. Materials and Methods: A descriptive research design was adopted. The study population constituted 38 branch managers working with commercial banks operating in Nakuru town. A census design was adopted where all members of the study population constituted the unit of analysis and unit of observation. A structured questionnaire was used to collect primary data from the respondents. The Statistical Package for Social Sciences was used to analyze data. Descriptive and inferential statistics were used in the analysis. Results: The investment diversification was found to relate with profitability of commercial banks significantly(r = 0.442; p = 0.035). Conclusion:It was concluded that commercial banks diversified their investments particularly in form of riskfree government securities, real estate, mutual funds and co-ownership in other firms