Diversification and Bank Lending Behaviour in Kenya

Lending is the principal business for banks, as it contributes the largest proportion of income to them. However, commercial banks in Sub-Saharan Africa, particularly in East Africa, have been observed to exhibit poor lending behavior, with gross loans growing at a very slow rate in these countries. Diversification of bank portfolios has been suggested as a potential solution to improve lending practices. Therefore, this study aimed to determine the effect of diversification on banks’ lending behavior in Kenya. The specific objectives were: To examine the effect of revenue diversification on banks’ lending behavior in Kenya, to assess the effect of asset diversification on banks’ lending behavior in Kenya, and to investigate the interaction effect of asset and revenue diversification on banks’ lending behavior in Kenya. This study was based on modern portfolio theory and the Ansoff model. The study followed descriptive and correlational research designs. The target population for the study was 43 commercial banks in Kenya for the period ranging from 2010 to 2022. Bank-specific data were obtained from the Bank Focus database base while country-level and macroeconomic data were sourced from the World Bank World Development Indicators. The results of the study showed a significantly positive relationship between income diversification and banks' lending behaviour. In contrast, asset diversification had a negative and significant impact on bank lending behaviour. Lastly, the study found no significant relationship between the interaction effect of revenue and asset diversification on commercial bank lending behavior in Kenya. Based on these findings, the study recommends that banks should enhance their revenue diversification while avoiding asset diversification and the combined use of revenue and asset diversification. Policymakers should promote regulatory frameworks that support effective diversification strategies to strengthen banks' lending capacity. Additionally, regulators should ensure that banks are equipped to manage the risks associated with diversification, thereby fostering a stable and resilient financial sector.