Diversification Strategy and Perceived Financial Sustainability of Commercial Banks in Nairobi County, Kenya

Abstract

This study examined the association between diversification strategy and perceived financial sustainability of commercial banks in Nairobi County, Kenya. A cross-sectional survey was conducted among heads of department and branch managers of the 38 licensed commercial banks. A proportionate stratified random sample of 160 was drawn; 148 questionnaires were returned (92.5%) and 147 were analysed. After confirmatory factor analysis and common-method bias tests, Pearson correlation and simple linear regression tested the hypothesis, and a supplementary multiple regression controlled for market penetration, product development and strategic alliance strategies. Diversification strategy was positively associated with perceived financial sustainability (r = .353, p < .001; B = 0.356, 95% CI [0.201, 0.511]; R² = .125), and the association remained significant with robust standard errors, after a marker-variable adjustment and under design-effect adjustment for respondents nested in banks. When the other growth strategies were controlled, the unique association was positive but not significant (B = 0.129, 95% CI [−0.027, 0.286], p = .104; ΔR² = .013). Both constructs were reported by the same managers at one-point in time, and several diversification items refer to perceived outcomes; the estimates are associations, not causal effects. Managers should evaluate diversification together with related growth strategies and against objective financial indicators. The study offers manager-level evidence on diversification and a three-dimensional measure of financial sustainability in Kenyan banking, and shows that the association weakens once related growth strategies are considered.