Analysis on how noninterest income influences bank’s performance: the case of Tanzanian banks

Abstract

The study investigated the impact of non interest income to banks’ performance in terms of profitability and income volatility. The profitability was measured by ROA and ROE while volatility was measured through standard deviation of ROA and ROE. Using a sample of seven commercial banks that represent more than half of total assets of the banking industry in Tanzania, it utilized data for 7 consecutive years from 2002 to 2008 from Bank of Tanzania financial reports; The findings of the study have shown that the successful implementation of diversification strategy and especially diversification towards non interest income activities is beneficial. However it is also influenced by the amount of assets the bank is holding. The study found that amount of assets increased in proportion to the income sources.The study found a positive relation between higher share of non-interest income and bank performance in terms of ROA and ROE. Also the results indicated that diversification reduces volatility of ROA though insignificant in ROE but reduced volatility of ROE.The results suggest that it is significantly beneficial for banks to diversify towards both noninterest income activities. However this should go in direct proportion to the growth of a bank’s total assets.