Income Diversification and Bank Risk-Return Trade-Off on the Nepalese Commercial Banks

Nepali, Som Raj

doi:10.18488/journal.aefr.2018.82.279.293

Cited by 16 publications

(13 citation statements)

References 17 publications

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“…Banks' income comprises the interest income (generated from lending activities) and non-interest income (earned from non-lending activities). These two revenue streams construct the Herfindahl–Hirschman Index (HHI) of income specialization (Nepali, 2018; Chiorazzo et al , 2008). HHI is computed, as shown below.where NET is the net interest income, NII is the net non-interest income and NETOP denotes net operating income, which equals to net non-interest income (NII) plus net-interest income (NET).…”

Section: Methodsmentioning

confidence: 99%

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Human capital, income diversification and bank performance–an empirical study of East African banks

Githaiga

2020

AJAR

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PurposeThe purpose of this paper is to examine whether income diversification moderates the relationship between human capital and bank performance.Design/methodology/approachThe study uses a sample of 53 banks and panel data for the years 2010–2018. The hypotheses are tested through hierarchical multiple regression and the choice between fixed effect and random effect estimation is based on the results of the Hausman test.FindingsThe study finds that human capital and income diversification significantly influence bank performance; however, the direction of the causality varies. While human capital has a positive effect, income diversification has a negative effect. Additionally, the interaction term has a negative and significant effect on bank performance, inferring that income diversification has an antagonistic effect on the human capital and bank performance relationship. For the control variable, liquidity and asset quality negatively affects bank performance while capitalization has a positive effect.Research limitations/implicationsHuman capital was measured as human capital efficiency (HCE), which is a quantitative measure of human capital, hence future studies can use qualitative measures. Also, the study focused on commercial banks in East Africa, future researcher may possibly consider other regions and industries, which would shed more insights.Practical implicationsThe results of this paper provide valuable insights. Bank managers can get a better understanding of the impact of human capital on bank performance, and the need to invest more in human capital development. Further, the study cautions bank managers that engaging in non-lending activities might destroy the economic value of human capital and ultimately lower performance. The study also recommends that policymakers should address the obstacles to banks' income diversification, for instance relaxing regulations restricting diversification; this might enable banks to leverage related financial service activities for optimal utilization of human capital and improve banks' profitability.Originality/valueWhile a good number of previous studies investigated the direct effect of human capital and income diversification on the performance of banks, this study examines the moderating role of income diversification on the relationship between human capital and performance of banks in East Africa.

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Section: Methodsmentioning

confidence: 99%

Section: Measurement Of Variablesmentioning

confidence: 99%

Human capital, income diversification and bank performance–an empirical study of East African banks

Githaiga

2020

AJAR

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“…Banks' operating income comprise of interest income generated from lending activities and non-interest income earned from nonlending activities. The standard measure of income diversification is Herfindahl-Hirschman Index (Jouida, 2018;Olarewaju, 2018;Nepali, 2018;Batool & Jamil, 2019;Brahmana et al, 2018). The study adopted Herfindahl represents the highest level of income diversification As HHI increases the bank becomes more diversified.…”

Section: Measurement Of Variablesmentioning

confidence: 99%

Income Diversification and Performance: Should banks trade

Githaiga

Yegon

Kimosop

2019

TR1001

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Unprecedented growth in financial innovations, changing customers' expectations, competition from nonbanking entities and regulatory pressure have distorted interest income stream. Thus, banks are now searching for new ways of income generation to cushion themselves against dwindling interest income and as a survival strategy. Proponents of portfolio theory conjecture that income diversification reduces income volatility and increase the profitability. It's from this background the study sought to investigate the effect of income diversification on performance of Kenyan commercial banks. Using 310 observations drawn from a sample of 31 commercial banks and panel data for the period 2008-2017, the study found that income diversification has a positive and significant effect on bank performance. Therefore, commercial banks are advised to consider investing in non-lending activities to better their financial performance. In view of this, the study has implications for bank regulators, scholars and practitioners

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“…Banks' operating income comprises of interest income generated from lending activities and non-interest income earned from nonlending activities. The standard measure of income diversification is the Herfindahl-Hirschman Index (Jouida, 2018;Olarewaju, 2018;Nepali, 2018;Batool & Jamil, 2019;Brahmana et al, 2018). The study adopted the Herfindahl-Hirschman Index (HHI) as the measure for income diversification.…”

Section: Measurement Of Variablesmentioning

confidence: 99%

Income Diversification andFinancial Perfomance. Should Banks Trade

Githaiga¹,

Yegon²

2019

jafas

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The purpose of this study is to examine the effect of income diversification on the financial performance of commercial banks in Kenya. Design/methodology/approach: The study used a sample of 31 commercial banks and panel data for the period 2008-2017. Data was extracted from the individual bank's financial reports and the Central Bank of Kenya's bank supervision annual reports. The data was analyzed through descriptive and inferential statistics, while the hypothesis was tested using fixed effect regression based on the results of the Hausman test. Financial performance was measured as return on assets (ROA), while Herfindahl-Hirschman Index (HHI) was used to measure income diversification. The study controlled for firm size, firm age and lending strategy. Findings: The findings indicated that income diversification had a positive and significant effect on banks' financial performance in Kenya. The control variables had varied effects; firm size had a positive effect, while firm age and lending strategy had a negative effect. Practical implications: The article offers insights to bank managers and the regulator. First managers should consider an optimal level of diversification to compensate for the deteriorating interest revenue. Second, the regulator should relax laws that limit the extent banks can diversify their revenue streams. Originality/value: Unlike previous studies which focused on developed and emerging economies, this study centered on a developing economy, and the findings are consistent with the propositions of the modern portfolio theory.

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Income Diversification and Bank Risk-Return Trade-Off on the Nepalese Commercial Banks

Abstract: Article History

Cited by 16 publications

References 17 publications

Human capital, income diversification and bank performance–an empirical study of East African banks

Human capital, income diversification and bank performance–an empirical study of East African banks

Income Diversification and Performance: Should banks trade

Income Diversification andFinancial Perfomance. Should Banks Trade

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