The Effect of Market Power on Bank Spread in a Diversified Product Portfolio: The Case of Commercial Banks in Kenya

Abstract

This paper examined how the relationship between market power and bank spread is affected by product diversification. Two different indicators were used for bank spread namely: interest rate spread and gross margin. We used bank level data from 13 commercial banks sampled from a total of 40 banks on the basis of availability of complete data for the period 2009-2018 through purposive sampling. The data was captured in panel data form and analysed using SPSS and STATA software to obtain descriptive, correlation and regression analyses. The main findings are that in the presence of a diversified portfolio, the impact of market power on bank spreads turns negative. Kenya’s banking sector has a diversified loan and deposits portfolio. Income streams still have a low diversification level with most incomes being linked to the lending activities of the banks.The study recommends further diversification of revenue streams and effective deployment of skilled staff to the credit function for effective management of the loan book to avoid high default incidence as a strategy for reducing bank spreads

Keywords: Bank spread, product diversification, market power

DOI: 10.7176/JESD/12-14-11

Publication date:July 31^st 2021