The effect of diversification on risk and return in banking sector

Abstract

Purpose The purpose of this paper is to investigate the effect of revenue diversification, non-interest income and asset diversification on the performance and stability of the Gulf Cooperation Council (GCC) conventional and Islamic banking systems. Design/methodology/approach The authors implement a panel of 69 conventional and Islamic banks listed in six GCC markets over the period of 2003–2015, using the System Generalized Method of Moments methodology. Findings Non-interest income diversification has a negative impact on GCC banks’ performance, while asset-based diversification affects banks performance positively. However, Investors tend to penalize the value of the banks’ assets, which are highly diversified. Government intervention, lack of competition, legal protection and high control of Central banks on GCC banks’ have positive impact on performance. Contrary to the results on conventional banks, asset diversification adds value to Islamic banks. Overall, both banks’ revenue and non-interest diversification have negative impact on GCC banks’ stability, while asset diversification improves Islamic banks’ stability. Research limitations/implications The analysis is limited to a sample of banks, which are listed in the GCC stock exchanges. The lack of data on private and foreign banks operating in the region made the analysis and, consequently, the results specific to shareholding companies. Also, the authors’ measures of bank stability might not be appropriate to use for Islamic banks, given their banking models implemented. Practical implications Research results provide important implications for regulators, bank managers and policy makers, as to the expected ways to support economic diversification through bank diversification strategies. Originality/value Unlike related studies, the authors’ sample of homogeneous banks has a market structure that is different from the samples in the literature covering either developed countries or heterogeneous samples from both developed and developing countries. Furthermore, using an efficient econometric methodology, the authors deal with two types of banks: conventional banks and Islamic banks. The research determines which type of bank is more able to benefit from different types of diversification. Unlike previous research, this research explores the sensitivity of the results both to the regulatory environment of the GCC market and to general market conditions.

Income structure, diversification strategy and owners’ benefit in cooperative financial institutions

“…Even in larger organisations, the impact of diversification may also be immaterial because these institutions are already engaged in a wide range of activities, so the economies of scope and other diversification benefits may soon disappear (Jouida, 2018). In a similar vein, AlKhouri and Arouri (2019) also find that shifting towards non-traditional activities goes beyond the core competencies of banks, resulting in inefficiencies and higher costs and thus decreasing banks' stability.…”

“…Conversely, another strand of literature is sceptical about the benefits of diversification and argues that it would heighten the financial instability of financial institutions (i.e. Stiroh, 2004; Stiroh and Rumble, 2006; DeYoung and Roland, 2001; AlKhouri and Arouri, 2019; Jouida, 2018). The first reason for this is that traditional income, in many cases, must be sacrificed for the sake of increasing the relevance of non-traditional activities (i.e.…”

Determinants of bank shareholder value: evidence from GCC countries

“…It is reported in the literature (Dekle and Lee, 2015; Fu et al , 2014; Dietrich and Wanzenried, 2014; Didier et al , 2012) that financial crises have a significant impact on bank performance in high-income economies, and a mixed impact on performance in medium- and low-income economies. However, no specific study has examined the impact of financial turmoil on bank shareholder value in Asian or African countries (Williams and Prather, 2010; Varotto, 2011; Adelopo et al , 2018; Asongu and Nwachukwu, 2018; Ozili, 2018) or in GCC economies (Zaki et al , 2011; Abraham, 2013; Shahari et al , 2015; Saif-Alyousfi et al , 2018a, b, c; AlKhouri and Arouri, 2019), apart from that of Maghyereh and Awartani (2014) who take the financial crisis as a dummy variable to study the banks’ efficiency in GCC countries during the period 2000–2009. It should be stressed that GCC countries have one of the largest banking markets in the Arab and MENA countries, and that the GCC banking sector represents the main source of financial intermediation.…”

Diversification, Relational Capital and Bank Performance: Evidence from Commercial Banks in China

“…Using data of 20 Tunisian commercial banks, Hamdi, Hakimi and Zaghdoudi (2017) conclude that ratio of non-interest income to total assets has positive impact on bank performance [2]. The study of Alkhouri and Arouri (2019) also show the positive effect of bank diversification on performance in case of 69 traditional banks and Islamic banks in GCC countries [3]. In addition, some empirical studies conclude that relational capital has effect on enterprise performance.…”