Abstract
Savings and Credit Co-operative Societies (SACCOs) are key contributors to Kenya's financial sector, promoting financial inclusion by mobilizing savings and providing affordable credit to their members. This dependence on traditional lending leaves them vulnerable to shocks such as rising loan defaults, economic downturns, and inefficiencies in management. This competitive environment has exerted pressure on their market share, profitability, and long-term financial sustainability, necessitating the adoption of income diversification strategies. Although income diversification has been widely recognized as a strategic approach to enhancing financial performance, empirical evidence on the effect of specific income sources on the financial performance of Tier One Deposit-Taking SACCOs in Kenya remains limited and inconclusive. The objective of this study was to examine the effect of income diversification on the financial performance of Tier One Deposit-Taking SACCOs in Kenya. Specifically, the study investigated the effects of interest income, service charge income. The study was anchored on Modern Portfolio Theory. The study adopted a longitudinal research design and utilized secondary panel data extracted from the audited financial statements of all 42 Tier One Deposit-Taking SACCOs licensed by the Sacco Societies Regulatory Authority (SASRA). The study covered a five-year period from 2019 to 2023. Descriptive statistics were used to summarize the data, while simple and multiple linear regression analyses were employed to test the study hypotheses and determine the effect of each income diversification component on financial performance. The findings revealed that interest income had a positive and statistically significant effect on financial performance (β = 1.14, t = 11.20, p < .001). Overall, the findings demonstrate that income diversification significantly contributed to 51.6% variation in the financial performance of Tier One Deposit-Taking SACCOs in Kenya (R2=0.51). The study concludes that interest income significantly enhances the financial performance of Tier One Deposit-Taking SACCOs in Kenya. Income diversification explained 51.6% of variations in financial performance, demonstrating its substantial contribution to SACCO financial sustainability. The study recommend that Tier One Deposit-Taking SACCOs in Kenya should strengthen income diversification strategies, particularly by expanding interest-generating financial products and services. Management should optimize lending activities, improve credit risk management, and identify profitable investment opportunities to increase interest income and enhance overall financial performance.