NON-FUNDED INCOME TRANSACTION COST AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

Abstract

This study determined the impact of transaction costs on Kenyan commercial banks' financial performance. Tighter regulation and increased competition from new digital entrants (digital disruption) have exacerbated revenue pressure and low profitability; that is to say low interest rates and higher capital on the traditional banking business models. Specifically, this has led to low performance and bank failures due to reduced loan income while at the same time resulting to increased investment in non-funded income among Kenyan banks. The study was anchored in modern portfolio theory (MPT). Panel data was used in this investigation whereby a census of Kenya's 40 commercial banks was done. The study employed quarterly results from a panel of data that spans five years. There were 800 observations made (i.e. quarterly observations for each of the 40 banks, for a 5 year period - 2016 to 2020). The research was based on secondary data. The findings showed a significant difference in average Return on Assets (ROA) between 2016 (50 percent) and 2017 (29.1 percent). Transaction costs showed an upward steady trend in the non-funded income variables from 2016 to 2020. The results of the correlation coefficient showed a significant and weak positive correlation between transaction costs and ROA over the study period, indicating that the percentage of transaction cost fluctuated over time. The study concluded that transaction costs had a positive relationship with commercial bank financial performance in Kenya. The study recommended that commercial banks in Kenya can rely on transaction costs as reliable sources of income to improve their financial performance. Keywords: Transaction Costs, Financial Performance, Commercial Bank, Return on Assets CITATION : Kanyuira, S. W., Mungai, J. N., & Muathe, S. M. A. (2023). Non-funded income transaction cost and financial performance of commercial banks in Kenya. The Strategic Journal of Business & Change Management, 10 (3), 622 – 631. http://dx.doi.org/10.61426/sjbcm.v10i3.2730