Financial Institutions and Services
Abstract
Diversification is a key area in financial institution since their activities have gone beyond
the traditional intermediary role. It is in this view that the study examines the effect of operational
diversification on bank performance using the pooled, fixed, random and System GMM for the period
2006 to 2015 across 250 commercial banks from 30 countries in the region. Due to the robustness of
SYS-GMM, the findings of this study reveal that using Herfindahl Hirschman index, all the
dimensions of operational diversification; asset, liability, deposit and income including control
variables such as bank size, liquidity, loan loss ratio, cost to income ratio and the lagged return on
average asset (ROAA (L1)) are significant at 1% level with only deposit diversification (HHIde),
liquidity (LOD) and cost to income ratio (CIR) which is a measure of banks‟ efficiency having
negative relationship with ROAA. Therefore, this study concludes that diversification of operational
activities in SSA commercial banks have direct and significant effect on their financial performances.
But, greater attention should be taken to monitor the diversification strategy so as to ensure that no
dimension of banks‟ activities is neglected.
References
Afzal, A. & Mirza, N. (2012). Size, diversification and risk: preliminary evidence from commercial
banks in Pakistan. Pakistan Journal of Commerce and Social Sciences, 6, pp. 282-296.
Aggarwal, R.K. & Samwick, A.A. (1999). Executive compensation, strategic competition, and
relative performance evaluation: Theory and evidence. The Journal of Finance, p. 54.
Amediku, J. (2012). The Impact of Income Diversification On Bank Performance: A Case Study of
Zenith Bank, Cal Bank And Unibank. Institute of Distance Learning, Kwame Nkrumah University of
Science and Technology.
Amidu, M. & Wolfe, S. (2013). Does bank competition and diversification lead to greater stability?
Evidence from emerging markets. Review of Development Finance, 3, pp. 152-166.
Arellano, M. & Bond, S. (1991a). Some tests of specification for panel data. Monte.
Arellano, M. & Bond, S. (1991b). Some tests of specification for panel data: Monte Carlo evidence
and an application to employment equations. The review of economic studies, 58, pp. 277-297.
Arellano, M. & Bover, O. (1995). Another look at the instrumental variable estimation of errorcomponents
models. Journal of econometrics, 68, pp. 29-51.
Armstrong, A. & Fic, T. (2014). Bank Diversification and Valuation: International Evidence.
National Institute of Economic and Social Research.
Baele, L.; De Jonghe, O. & Vander Vennet, R. (2007). Does the stock market value bank
diversification?. Journal of Banking & Finance, 31, pp. 1999-2023.
Behr, A.; Kamp, A.; Memmel, C. & Pfingsten, A. (2007). Diversification and the banks' risk-returncharacteristics:
evidence from loan portfolios of German banks.
Berger, A.N.; Hasan, I. & Zhou, M. (2010). The effects of focus versus diversification on bank
performance: Evidence from Chinese banks. Journal of Banking & Finance, 34, pp. 1417-1435.
Berger, P.G. & Ofek, E. (1996). Bustup takeovers of value‐destroying diversified firms. The Journal
of Finance, 51, pp. 1175-1200.
Blundell, R. & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data
models. Journal of econometrics, 87, pp. 115-143.
Cohen, B.H. (2013). How have banks adjusted to higher capital requirements?. Browser Download
This Paper.
Contractor, F.J.; Kundu, S.K. & Hsu, C.C. (2003). A three-stage theory of international expansion:
The link between multinationality and performance in the service sector. Journal of international
business studies, 34, pp. 5-18.
Datta, D.K.; Rajagopalan, N. & Rasheed, A. (1991). Diversification and performance: Critical review
and future directions. Journal of Management Studies, 28, pp. 529-558.
Delorme Jr, C.D.; Kamerschen, D.R.; Klein, P.G. & Voeks, L.F. (2002). Structure, conduct and
performance: a simultaneous equations approach. Applied economics, 34, pp. 2135-2141.
Demirgüç-Kunt, A. & Huizinga, H. (2010). Bank activity and funding strategies: The impact on risk
and returns. Journal of Financial Economics, 98, pp. 626-650.
Demsetz, R.S. & Strahan, P.E. (1997). Diversification, size, and risk at bank holding companies.
Journal of money, credit, and banking, pp. 300-313.
Deyoung, R. & Rice, T. (2004). How do banks make money? The fallacies of fee income. Economic
Perspectives-Federal Reserve Bank of Chicago, 28, p. 34.
Doumpos, M.; Gaganis, C. & Pasiouras, F. (2013). Bank Diversification and Overall Financial
Strength: International Evidence around the Crisis. Financial Engineering Laboratory: Technical
University of Crete, Working paper, No. 3, November.
Elsas, R.; Hackethal, A. & Holzhäuser, M. (2010). The anatomy of bank diversification. Journal of
Banking & Finance, 34, pp. 1274-1287.
Gaughan, P.A. (2005). Mergers: what can go wrong and how to prevent it. John Wiley & Sons.
Goddard, J.; Mckillop, D. & Wilson, J.O. (2008). The diversification and financial performance of US
credit unions. Journal of Banking & Finance, 32, pp. 1836-1849.
Goetz, M.R.; Laeven, L. & Levine, R. (2013). Identifying the valuation effects and agency costs of
corporate diversification: Evidence from the geographic diversification of US banks. Review of
Financial Studies, hht021.
Gurbuz, A.O.; Yanik, S. & Ayturk, Y. (2013). Income diversification and bank performance:
Evidence from Turkish banking sector. BDDK Bankacilik ve Finansal Piyasalar, 7, pp. 9-29.
Han, C. & Phillips, P.C. (2010). GMM estimation for dynamic panels with fixed effects and strong
instruments at unity. Econometric theory, 26, pp. 119-151.
Hayakawa, K. (2014). Alternative Over-Identifying Restriction Test in GMM Estimation of Panel
Data Models. Mimeo.
Hsiao, C.; Pesaran, M.H. & Tahmiscioglu, A.K. (2002). Maximum likelihood estimation of fixed
effects dynamic panel data models covering short time periods. Journal of econometrics, pp. 109,
107-150.
Jensen, M.C. & Meckling, W.H. (1976). Theory of the firm: Managerial behavior, agency costs and
ownership structure. Journal of financial economics, 3, pp. 305-360.
kiweu, J. (2014). Income diversification in the banking sector and earnings volatility: evidence from
Kenyan commercial banks. Retrived on May 17.
Kurincheedaran, S. (2015). Sectoral diversification and bank performance: An empirical study on
domestic licensed commercial banks in Sri Lanka.
Landi, A. & Venturelli, V. (2001). The diversification strategy of european banks: determinants and
effects on efficiency and profitability.
Liang, J.N. & Rhoades, S.A. (1991). Asset diversification, firm risk, and risk-based capital
requirements in banking. Review of Industrial Organization, 6, pp. 49-59.
Mishra, D.S.P. & Sahoo, D. (2012). Operational diversification and stability of financial performance
in Indian banking sector: A panel data investigation. Research Journal of Finance and Accounting, 3,
pp. 70-87.
Mlachila, M.; Park, S.G. & Yabara, M. (2013). Banking in sub-Saharan Africa: the macroeconomic
context. Banking in sub-Saharan Africa, p. 7.
Mulwa, I.M.; Tarus, D. & Kosgei, D. (2015). Commercial Bank Diversification: A Theoretical
Survey. International Journal of Research in Management & Business Studies, 2, pp. 45-49.
Nabieu, G.A. (2013). The structure, conduct and performance of commercial banks in Ghana.
European Journal of Business and Innovation Research, 1, pp. 34-47.
Pathan, S. & Skully, M. (2010). Endogenously structured boards of directors in banks. Journal of
Banking & Finance, 34, pp. 1590-1606.
Penrose, E.T. (1959). The theory of the growth of the firm. Cambridge: MA.
Porter, M.E. (1980). Industry structure and competitive strategy: Keys to profitability. Financial
Analysts Journal, pp. 30-41.
Roll, R. (1986). The hubris hypothesis of corporate takeovers. Journal of business, pp. 197-216.
Rotemberg, J.J. & Saloner, G. (1994). Benefits of narrow business strategies. The American
Economic Review, pp. 1330-1349.
Rubin, P.H. (1973). The expansion of firms. Journal of political Economy, 81, pp. 936-949.
Saksonova, S. & Solovjova, I. (2011). Analysis of the Quality And Profitability Of Assets In The
Banking System And The Impact Of Macroeconomic Factors On Its Stability-Case Of Latvia.
International Conference On Applied Economics, pp. 537-548.
Senyo, D.B.; Olivia, A.-T. & Musah, A. (2015). Income diversification and financial stability of
banks in Ghana. International Journal of Business and Social Science, p. 6.
Shleifer, A. & Vishny, R.W. (1989). Management entrenchment: The case of manager-specific
investments. Journal of financial economics, 25, pp. 123-139.
Simpasa, A. & Pla, L. (2016). Sectoral Credit Concentration and Bank Performance in Zambia.
Sissy, A.M. (2015). The Effects of Revenue Diversification and Cross Border Banking on Risk and
Return. University of Ghana.
Skully, M. & Perera, S. (2012. Market power, revenue diversification and bank stability: Evidence
from selected South Asian countries. Journal of International Financial Markets, Institutions and
Money, 22, pp. 897-912.
Stiroh, K.J. (2004). Diversification in banking: Is noninterest income the answer? Journal of Money,
Credit, and Banking, 36, pp. 853-882.
Stiroh, K.J. & Rumble, A. (2006). The dark side of diversification: The case of US financial holding
companies. Journal of banking & finance, 30, pp. 2131-2161.
Teimet, P.R.; Ochieng, D. & Away, S. (2011). Income source diversification and financial
performance of commercial banks in Kenya. International Journal of Business and Public
Management, 1, pp. 69-89.
Turkmen, S.Y. & Yigit, I. (2012). Diversification in Banking and its Effect on Banks‟ Performance:
Evidence from Turkey. American International Journal of Contemporary Research, 2(12), pp. 111-
119.
Ugwuanyi, G.O. & Ugwu, J.N. (2012). The Effect of Corporate Diversification on the Profitability of
the Financial Services Sector in Nigeria. Development, 47, p. 1341.
Vieira, C.A.M. & Girão, L.F.D.A.P. (2016). Revenue diversification and insolvency risk of brazilian
banks. Revista de Contabilidade e Organizações, p. 10.
banks in Pakistan. Pakistan Journal of Commerce and Social Sciences, 6, pp. 282-296.
Aggarwal, R.K. & Samwick, A.A. (1999). Executive compensation, strategic competition, and
relative performance evaluation: Theory and evidence. The Journal of Finance, p. 54.
Amediku, J. (2012). The Impact of Income Diversification On Bank Performance: A Case Study of
Zenith Bank, Cal Bank And Unibank. Institute of Distance Learning, Kwame Nkrumah University of
Science and Technology.
Amidu, M. & Wolfe, S. (2013). Does bank competition and diversification lead to greater stability?
Evidence from emerging markets. Review of Development Finance, 3, pp. 152-166.
Arellano, M. & Bond, S. (1991a). Some tests of specification for panel data. Monte.
Arellano, M. & Bond, S. (1991b). Some tests of specification for panel data: Monte Carlo evidence
and an application to employment equations. The review of economic studies, 58, pp. 277-297.
Arellano, M. & Bover, O. (1995). Another look at the instrumental variable estimation of errorcomponents
models. Journal of econometrics, 68, pp. 29-51.
Armstrong, A. & Fic, T. (2014). Bank Diversification and Valuation: International Evidence.
National Institute of Economic and Social Research.
Baele, L.; De Jonghe, O. & Vander Vennet, R. (2007). Does the stock market value bank
diversification?. Journal of Banking & Finance, 31, pp. 1999-2023.
Behr, A.; Kamp, A.; Memmel, C. & Pfingsten, A. (2007). Diversification and the banks' risk-returncharacteristics:
evidence from loan portfolios of German banks.
Berger, A.N.; Hasan, I. & Zhou, M. (2010). The effects of focus versus diversification on bank
performance: Evidence from Chinese banks. Journal of Banking & Finance, 34, pp. 1417-1435.
Berger, P.G. & Ofek, E. (1996). Bustup takeovers of value‐destroying diversified firms. The Journal
of Finance, 51, pp. 1175-1200.
Blundell, R. & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data
models. Journal of econometrics, 87, pp. 115-143.
Cohen, B.H. (2013). How have banks adjusted to higher capital requirements?. Browser Download
This Paper.
Contractor, F.J.; Kundu, S.K. & Hsu, C.C. (2003). A three-stage theory of international expansion:
The link between multinationality and performance in the service sector. Journal of international
business studies, 34, pp. 5-18.
Datta, D.K.; Rajagopalan, N. & Rasheed, A. (1991). Diversification and performance: Critical review
and future directions. Journal of Management Studies, 28, pp. 529-558.
Delorme Jr, C.D.; Kamerschen, D.R.; Klein, P.G. & Voeks, L.F. (2002). Structure, conduct and
performance: a simultaneous equations approach. Applied economics, 34, pp. 2135-2141.
Demirgüç-Kunt, A. & Huizinga, H. (2010). Bank activity and funding strategies: The impact on risk
and returns. Journal of Financial Economics, 98, pp. 626-650.
Demsetz, R.S. & Strahan, P.E. (1997). Diversification, size, and risk at bank holding companies.
Journal of money, credit, and banking, pp. 300-313.
Deyoung, R. & Rice, T. (2004). How do banks make money? The fallacies of fee income. Economic
Perspectives-Federal Reserve Bank of Chicago, 28, p. 34.
Doumpos, M.; Gaganis, C. & Pasiouras, F. (2013). Bank Diversification and Overall Financial
Strength: International Evidence around the Crisis. Financial Engineering Laboratory: Technical
University of Crete, Working paper, No. 3, November.
Elsas, R.; Hackethal, A. & Holzhäuser, M. (2010). The anatomy of bank diversification. Journal of
Banking & Finance, 34, pp. 1274-1287.
Gaughan, P.A. (2005). Mergers: what can go wrong and how to prevent it. John Wiley & Sons.
Goddard, J.; Mckillop, D. & Wilson, J.O. (2008). The diversification and financial performance of US
credit unions. Journal of Banking & Finance, 32, pp. 1836-1849.
Goetz, M.R.; Laeven, L. & Levine, R. (2013). Identifying the valuation effects and agency costs of
corporate diversification: Evidence from the geographic diversification of US banks. Review of
Financial Studies, hht021.
Gurbuz, A.O.; Yanik, S. & Ayturk, Y. (2013). Income diversification and bank performance:
Evidence from Turkish banking sector. BDDK Bankacilik ve Finansal Piyasalar, 7, pp. 9-29.
Han, C. & Phillips, P.C. (2010). GMM estimation for dynamic panels with fixed effects and strong
instruments at unity. Econometric theory, 26, pp. 119-151.
Hayakawa, K. (2014). Alternative Over-Identifying Restriction Test in GMM Estimation of Panel
Data Models. Mimeo.
Hsiao, C.; Pesaran, M.H. & Tahmiscioglu, A.K. (2002). Maximum likelihood estimation of fixed
effects dynamic panel data models covering short time periods. Journal of econometrics, pp. 109,
107-150.
Jensen, M.C. & Meckling, W.H. (1976). Theory of the firm: Managerial behavior, agency costs and
ownership structure. Journal of financial economics, 3, pp. 305-360.
kiweu, J. (2014). Income diversification in the banking sector and earnings volatility: evidence from
Kenyan commercial banks. Retrived on May 17.
Kurincheedaran, S. (2015). Sectoral diversification and bank performance: An empirical study on
domestic licensed commercial banks in Sri Lanka.
Landi, A. & Venturelli, V. (2001). The diversification strategy of european banks: determinants and
effects on efficiency and profitability.
Liang, J.N. & Rhoades, S.A. (1991). Asset diversification, firm risk, and risk-based capital
requirements in banking. Review of Industrial Organization, 6, pp. 49-59.
Mishra, D.S.P. & Sahoo, D. (2012). Operational diversification and stability of financial performance
in Indian banking sector: A panel data investigation. Research Journal of Finance and Accounting, 3,
pp. 70-87.
Mlachila, M.; Park, S.G. & Yabara, M. (2013). Banking in sub-Saharan Africa: the macroeconomic
context. Banking in sub-Saharan Africa, p. 7.
Mulwa, I.M.; Tarus, D. & Kosgei, D. (2015). Commercial Bank Diversification: A Theoretical
Survey. International Journal of Research in Management & Business Studies, 2, pp. 45-49.
Nabieu, G.A. (2013). The structure, conduct and performance of commercial banks in Ghana.
European Journal of Business and Innovation Research, 1, pp. 34-47.
Pathan, S. & Skully, M. (2010). Endogenously structured boards of directors in banks. Journal of
Banking & Finance, 34, pp. 1590-1606.
Penrose, E.T. (1959). The theory of the growth of the firm. Cambridge: MA.
Porter, M.E. (1980). Industry structure and competitive strategy: Keys to profitability. Financial
Analysts Journal, pp. 30-41.
Roll, R. (1986). The hubris hypothesis of corporate takeovers. Journal of business, pp. 197-216.
Rotemberg, J.J. & Saloner, G. (1994). Benefits of narrow business strategies. The American
Economic Review, pp. 1330-1349.
Rubin, P.H. (1973). The expansion of firms. Journal of political Economy, 81, pp. 936-949.
Saksonova, S. & Solovjova, I. (2011). Analysis of the Quality And Profitability Of Assets In The
Banking System And The Impact Of Macroeconomic Factors On Its Stability-Case Of Latvia.
International Conference On Applied Economics, pp. 537-548.
Senyo, D.B.; Olivia, A.-T. & Musah, A. (2015). Income diversification and financial stability of
banks in Ghana. International Journal of Business and Social Science, p. 6.
Shleifer, A. & Vishny, R.W. (1989). Management entrenchment: The case of manager-specific
investments. Journal of financial economics, 25, pp. 123-139.
Simpasa, A. & Pla, L. (2016). Sectoral Credit Concentration and Bank Performance in Zambia.
Sissy, A.M. (2015). The Effects of Revenue Diversification and Cross Border Banking on Risk and
Return. University of Ghana.
Skully, M. & Perera, S. (2012. Market power, revenue diversification and bank stability: Evidence
from selected South Asian countries. Journal of International Financial Markets, Institutions and
Money, 22, pp. 897-912.
Stiroh, K.J. (2004). Diversification in banking: Is noninterest income the answer? Journal of Money,
Credit, and Banking, 36, pp. 853-882.
Stiroh, K.J. & Rumble, A. (2006). The dark side of diversification: The case of US financial holding
companies. Journal of banking & finance, 30, pp. 2131-2161.
Teimet, P.R.; Ochieng, D. & Away, S. (2011). Income source diversification and financial
performance of commercial banks in Kenya. International Journal of Business and Public
Management, 1, pp. 69-89.
Turkmen, S.Y. & Yigit, I. (2012). Diversification in Banking and its Effect on Banks‟ Performance:
Evidence from Turkey. American International Journal of Contemporary Research, 2(12), pp. 111-
119.
Ugwuanyi, G.O. & Ugwu, J.N. (2012). The Effect of Corporate Diversification on the Profitability of
the Financial Services Sector in Nigeria. Development, 47, p. 1341.
Vieira, C.A.M. & Girão, L.F.D.A.P. (2016). Revenue diversification and insolvency risk of brazilian
banks. Revista de Contabilidade e Organizações, p. 10.
Downloads
Published
2021-06-07
How to Cite
Collective Authors. (2021). Financial Institutions and Services: Array. Acta Universitatis Danubius. Œconomica, 13(5). Retrieved from https://dj.univ-danubius.ro/index.php/AUDOE/article/view/1138
Issue
Section
Articles
License
The author fully assumes the content originality and the holograph signature makes him responsible in case of trial.
