Income Diversification and Intermediation Efficiency: Evidence from Deposit Taking Sacco Societies in Kenya

Abstract

Research on the relationship between diversification into nontraditional income streams and firm efficiency is scanty. The study seeks to fill the gap by evaluating the relationship between diversification into non interest income and intermediation efficiency of Deposit Taking Sacco Societies (DTSs) in Kenya using a two staged methodology. In the first stage, efficiency scores are generated using Data Envelopment Analysis (DEA), corrected for bias using bootstrapping and used as dependent variable in the fixed effect regression model estimated in the second stage. A balanced panel data of 103 DTSs for a period 2011-2014 was used in the study. The results showed that there exists an inverse relationship between the ratio of noninterest income to total assets and intermediation efficiency. This implied that diversification hurts efficiency.

Keywords: Data Envelopment Analysis, Deposit Taking Sacco, Diversification, Intermediation Efficiency, Noninterest income.