IDEAS home Printed from https://ideas.repec.org/a/dug/actaec/y2017i5p84-106.html
   My bibliography  Save this article

Operational Diversification and Financial Performance of Sub-Saharan Africa Commercial Banks: Static and Dynamic Approach

Author

Listed:
  • Odunayo Magret Olarewaju

    (University of KwaZulu-Nata)

  • Stephen Oseko Migiro

    (University of KwaZulu-Natal)

  • Mabutho Sibanda

    (University of KwaZulu-Natal)

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.

Suggested Citation

  • Odunayo Magret Olarewaju & Stephen Oseko Migiro & Mabutho Sibanda, 2017. "Operational Diversification and Financial Performance of Sub-Saharan Africa Commercial Banks: Static and Dynamic Approach," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 13(5), pages 84-106, OCTOBER.
    • Handle: RePEc:dug:actaec:y:2017:i:5:p:84-106
    as

    Download full text from publisher

    File URL: http://journals.univ-danubius.ro/index.php/oeconomica/article/view/4092/4210
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Rotemberg, Julio J & Saloner, Garth, 1994. "Benefits of Narrow Business Strategies," American Economic Review, American Economic Association, vol. 84(5), pages 1330-1349, December.
    2. Shleifer, Andrei & Vishny, Robert W., 1989. "Management entrenchment : The case of manager-specific investments," Journal of Financial Economics, Elsevier, vol. 25(1), pages 123-139, November.
    3. Berger, Philip G & Ofek, Eli, 1996. "Bustup Takeovers of Value-Destroying Diversified Firms," Journal of Finance, American Finance Association, vol. 51(4), pages 1175-1200, September.
    4. Robert DeYoung & Tara N. Rice, 2004. "How do banks make money? the fallacies of fee income," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 28(Q IV), pages 34-51.
    5. Benjamin Cohen, 2013. "How have banks adjusted to higher capital requirements?," BIS Quarterly Review, Bank for International Settlements, September.
    6. Stiroh, Kevin J. & Rumble, Adrienne, 2006. "The dark side of diversification: The case of US financial holding companies," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2131-2161, August.
    7. Deepak K. Datta & Nandini Rajagopalan & Abdul M. A. Rasheed, 1991. "Diversification and Performance: Critical Review and Future Directions," Journal of Management Studies, Wiley Blackwell, vol. 28(5), pages 529-558, September.
    8. Stiroh, Kevin J, 2004. "Diversification in Banking: Is Noninterest Income the Answer?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 853-882, October.
    9. Berger, Allen N. & Hasan, Iftekhar & Zhou, Mingming, 2010. "The effects of focus versus diversification on bank performance: Evidence from Chinese banks," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1417-1435, July.
    10. Elsas, Ralf & Hackethal, Andreas & Holzhäuser, Markus, 2010. "The anatomy of bank diversification," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1274-1287, June.
    11. Rajesh K. Aggarwal & Andrew A. Samwick, 1999. "Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 1999-2043, December.
    12. Nguyen, My & Skully, Michael & Perera, Shrimal, 2012. "Bank market power and revenue diversification: Evidence from selected ASEAN countries," Journal of Asian Economics, Elsevier, vol. 23(6), pages 688-700.
    13. Han, Chirok & Phillips, Peter C. B., 2010. "Gmm Estimation For Dynamic Panels With Fixed Effects And Strong Instruments At Unity," Econometric Theory, Cambridge University Press, vol. 26(1), pages 119-151, February.
    14. Robert DeYoung & Tara N. Rice, 2004. "How do banks make money? a variety of business strategies," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 28(Q IV), pages 52-67.
    15. repec:zbw:bofitp:2010_004 is not listed on IDEAS
    16. Rubin, Paul H, 1973. "The Expansion of Firms," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 936-949, July-Aug..
    17. Ali Osman GURBUZ & Serhat YANIK & Yusuf AYTURK, 2013. "Income Diversification and Bank Performance: Evidence From Turkish Banking Sector," Journal of BRSA Banking and Financial Markets, Banking Regulation and Supervision Agency, vol. 7(1), pages 9-29.
    18. Charles DeLorme & Peter Klein & David Kamerschen & Lisa Ford Voeks, 2003. "Structure, conduct and performance: a simultaneous equations approach," Applied Economics, Taylor & Francis Journals, vol. 35(1), pages 13-20.
    19. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    20. Martin R. Goetz & Luc Laeven & Ross Levine, 2013. "Identifying the Valuation Effects and Agency Costs of Corporate Diversification: Evidence from the Geographic Diversification of U.S. Banks," The Review of Financial Studies, Society for Financial Studies, vol. 26(7), pages 1787-1823.
    21. Farok J Contractor & Sumit K Kundu & Chin-Chun Hsu, 2003. "A three-stage theory of international expansion: the link between multinationality and performance in the service sector," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 34(1), pages 5-18, January.
    22. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    23. Goddard, John & McKillop, Donal & Wilson, John O.S., 2008. "The diversification and financial performance of US credit unions," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1836-1849, September.
    24. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    25. Demirgüç-Kunt, Asli & Huizinga, Harry, 2010. "Bank activity and funding strategies: The impact on risk and returns," Journal of Financial Economics, Elsevier, vol. 98(3), pages 626-650, December.
    26. Angus Armstrong & Tatiana Fic, 2014. "Bank Diversification and Valuation: International Evidence," National Institute of Economic and Social Research (NIESR) Discussion Papers 438, National Institute of Economic and Social Research.
    27. Behr, Andreas & Kamp, Andreas & Memmel, Christoph & Pfingsten, Andreas, 2007. "Diversification and the banks' risk-return-characteristics: evidence from loan portfolios of German banks," Discussion Paper Series 2: Banking and Financial Studies 2007,05, Deutsche Bundesbank.
    28. Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
    29. Mr. Montfort Mlachila & Mr. Masafumi Yabara, 2013. "Banking in Sub-Saharan Africa: The Macroeconomic Context," IMF Departmental Papers / Policy Papers 2013/004, International Monetary Fund.
    30. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
    31. Hsiao, Cheng & Hashem Pesaran, M. & Kamil Tahmiscioglu, A., 2002. "Maximum likelihood estimation of fixed effects dynamic panel data models covering short time periods," Journal of Econometrics, Elsevier, vol. 109(1), pages 107-150, July.
    32. Baele, Lieven & De Jonghe, Olivier & Vander Vennet, Rudi, 2007. "Does the stock market value bank diversification?," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1999-2023, July.
    33. Pathan, Shams & Skully, Michael, 2010. "Endogenously structured boards of directors in banks," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1590-1606, July.
    34. Nguyen, My & Skully, Michael & Perera, Shrimal, 2012. "Market power, revenue diversification and bank stability: Evidence from selected South Asian countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 897-912.
    35. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    36. Michael Doumpos & Chrysovalantis Gaganis & Fotios Pasiouras, 2016. "Bank Diversification and Overall Financial Strength: International Evidence," Working Papers 1602, University of Crete, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jeon, Bang Nam & Wu, Ji & Chen, Limei & Chen, Minghua, 2020. "Diversification, efficiency and risk of banks: New consolidating evidence from emerging economies," School of Economics Working Paper Series 2020-10, LeBow College of Business, Drexel University.
    2. Haykel Zouaoui & Faten Zoghlami, 2023. "What do we know about the impact of income diversification on bank performance? A systematic literature review," Journal of Banking Regulation, Palgrave Macmillan, vol. 24(3), pages 286-309, September.
    3. Meslier, Céline & Tacneng, Ruth & Tarazi, Amine, 2014. "Is bank income diversification beneficial? Evidence from an emerging economy," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 97-126.
    4. Williams, Barry & Rajaguru, Gulasekaran, 2022. "The evolution of bank revenue and risk in the Asia-Pacific Region," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    5. Abuzayed, Bana & Al-Fayoumi, Nedal & Molyneux, Phil, 2018. "Diversification and bank stability in the GCC," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 57(C), pages 17-43.
    6. Francis, Bill B. & Hasan, Iftekhar & Küllü, A. Melih & Zhou, Mingming, 2018. "Should banks diversify or focus? Know thyself: The role of abilities," Economic Systems, Elsevier, vol. 42(1), pages 106-118.
    7. Mostak Ahamed, M., 2017. "Asset quality, non-interest income, and bank profitability: Evidence from Indian banks," Economic Modelling, Elsevier, vol. 63(C), pages 1-14.
    8. Zouaoui, Haykel & Zoghlami, Feten, 2020. "On the income diversification and bank market power nexus in the MENA countries: Evidence from a GMM panel-VAR approach," Research in International Business and Finance, Elsevier, vol. 52(C).
    9. Shoaib Nisar & Ke Peng & Susheng Wang & Badar Nadeem Ashraf, 2018. "The Impact of Revenue Diversification on Bank Profitability and Stability: Empirical Evidence from South Asian Countries," IJFS, MDPI, vol. 6(2), pages 1-25, April.
    10. Minzhi Wu & Emili Tortosa-Ausina, 2020. "Bank Diversification and Focus in Disruptive Times: China, 2007–2018," Working Papers 2020/21, Economics Department, Universitat Jaume I, Castellón (Spain).
    11. Shabir, Mohsin & Jiang, Ping & Shahab, Yasir & Wang, Wenhao & Işık, Özcan & Mehroush, Iqra, 2024. "Diversification and bank stability: Role of political instability and climate risk," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 63-92.
    12. Moudud-Ul-Huq, Syed & Ashraf, Badar Nadeem & Gupta, Anupam Das & Zheng, Changjun, 2018. "Does bank diversification heterogeneously affect performance and risk-taking in ASEAN emerging economies?," Research in International Business and Finance, Elsevier, vol. 46(C), pages 342-362.
    13. Kim, Hakkon & Batten, Jonathan A. & Ryu, Doojin, 2020. "Financial crisis, bank diversification, and financial stability: OECD countries," International Review of Economics & Finance, Elsevier, vol. 65(C), pages 94-104.
    14. Curi, Claudia & Lozano-Vivas, Ana & Zelenyuk, Valentin, 2015. "Foreign bank diversification and efficiency prior to and during the financial crisis: Does one business model fit all?," Journal of Banking & Finance, Elsevier, vol. 61(S1), pages 22-35.
    15. Laura Baselga-Pascual & Olga Del Orden-Olasagasti & Antonio Trujillo-Ponce, 2018. "Toward a More Resilient Financial System: Should Banks Be Diversified?," Sustainability, MDPI, vol. 10(6), pages 1-16, June.
    16. Karolina Vozkova, 2018. "Why Did EU Banks Change Their Business Models in Last Years and What Was the Impact of Net Fee and Commission Income on Their Performance?," Working Papers IES 2018/04, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Feb 2018.
    17. Jouida, Sameh & Bouzgarrou, Houssam & Hellara, Slaheddine, 2017. "The effects of activity and geographic diversification on performance: Evidence from French financial institutions," Research in International Business and Finance, Elsevier, vol. 39(PB), pages 920-939.
    18. Wu, Ji & Chen, Limei & Chen, Minghua & Jeon, Bang Nam, 2020. "Diversification, efficiency and risk of banks: Evidence from emerging economies," Emerging Markets Review, Elsevier, vol. 45(C).
    19. Mariarosa Borroni & Simone Rossi, 2017. "Does revenue diversification still matter in banking? Evidence from some European countries," DISCE - Quaderni del Dipartimento di Scienze Economiche e Sociali dises1723, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    20. Šeho, Mirzet & Ibrahim, Mansor H. & Mirakhor, Abbas, 2021. "Does sectoral diversification of loans and financing improve bank returns and risk in dual-banking systems?," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:dug:actaec:y:2017:i:5:p:84-106. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Daniela Robu (email available below). General contact details of provider: https://edirc.repec.org/data/fedanro.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.