Abstract:
Profitability of commercial banks highly depends on the net interest income
generating activities. Due to the profitability and stiff competition, banks have
changed their income sources, by diversifying into non-interest income generating
activities. The objective of the study is to investigate the impact of income source
diversification on financial performance of commercial banks in Sri Lanka.
The study used secondary data of 15 commercial banks covering the period of 2008-
2017. Diversification Index used as diversification indicator while Return on Assets
(ROA) and Return on Equity (ROE) used as performance indicators. There are some
control variables like asset size, growth rate, equity ratio and loan ratio added to the
model to ensure that there is no any affect for the relationship between bank income
diversification and bank performance from those variables. Descriptive statistics,
correlation and regression analysis have used as analytical tools of the study. Results
revealed that there is a positive relationship between income diversification and bank
performance despite the fact that degree of diversification being not in the peak within
Sri Lankan context. Additionally asset size, loan ratio and asset growth variables are
not significant variables to the both ROA and ROE models and equity ratio variable
shows a significant negative relationship with bank performance in both models
