As a result of the continual debate between portfolio optimization and the assumption of corporate strategy, it is debatable whether diversification enhances stability. This study examines the effect of diversification on bank stability by employing panel data representing 45 African nations between 2000 and 2020. Based on dynamic panel generalized moments techniques, the results support portfolio theory; diversification reduces risk and improves bank stability in emerging and developing economies during crisis and noncrisis periods. Bank diversification and stability have a quadratic association; overdiversification exposes banks to risk. The results also suggest that banks with a high interest margin, liquidity, and an increased cost-to-income ratio tend to become less stable. On the other hand, banks with higher leverage and operating in a country with country-level solid corporate governance are more stable. GDP growth and inflation have a substantial influence on the financial health of banks. This research has significant repercussions for banks, policymakers, and academics aware of the impact of diversification on a bank’s risk and stability in emerging and developing markets.

PurposeThe impact of diversification on bank stability and risk remains an ongoing topic of discussion with inconclusive results. Hence, this study investigated the implications of income diversification on bank stability within African markets.Design/methodology/approachThe study utilised longitudinal financial data on 45 countries from 2000 to 2017 and employed static and dynamic panel model estimation.FindingsThe results of the study suggest income diversification technique could improve financial stability throughout typical and crisis periods which validate portfolio management theory. The study also confirms the “too big to fail” hypothesis, extensive diversifying over an optimal range negatively impacts stability. Banks with a high level of liquidity, a higher operating efficiency and a larger deposit ratio become more resilient. Banking capital regulations found to be the appropriate monitoring instrument for lowering risks and maintaining stability. However, profitability was found to have a positive effect on bank risk-taking. The finding also suggests that political institutions have substantial, direct implications that are positively related to bank fragility. Macroeconomic factors such as gross domestic product (GDP) growth and inflation also influenced bank stability.Practical implicationsThis study has important implications for bankers, regulators and academicians concerned about the effect of diversification on a bank’s risk-taking or stability in developing economies.Originality/valueTo the best of the author’s knowledge, this is the first study on Africa to analyse the quadratic influence of income diversification and the effects of political institutions on the level of bank stability.

The continued political instability in Ethiopia’s Tigray Region has made it tough for bankers to recover loan repayments, triggering banks’ nonperforming assets to rise. Beyond the bank industry-specific and macroeconomic determinants, the article aims to understand the relationship between political stability and credit risk. The article focuses on 16 Ethiopian banks to understand the mentioned relationship in developing countries. From 2010 to 2020, data are obtained from the World Governance Indicators, World Development Indicators database and Ethiopia’s National Bank. Based on a two-step dynamic panel estimator, the results suggest that political stability is negatively correlated with credit risk, while political instability does have a positive impact on bank credit risk. Credit risk was inversely related to increased operating efficiency, diversified earnings and national currency appreciation. In contrast, greater bank size, rising inflation and economic expansion all contribute to a high level of credit risk. The loan-to-asset ratio and profitability were shown to have a minor influence on nonperforming loans (NPLs). Thus, this study provides a better understanding of the effects of political stability on the factors that determine levels of NPLs in developing economies.

Using panel data from 2000 to 2019 for low-income and middle-income African countries, this study examined what determines income diversification and its impact on bank risk and performance. Based on the system’s generalized method of moments and least square dummy variable results, high volatility risk, profitability, cost efficiency and high GDP encourage banks to diversify their income. While having lower leverage, a high net interest margin, and during inflationary times, banks are less encouraged to pursue income diversification. Moreover, income-diverse approaches improve profitability in regular and crisis periods for low-income and middle-income countries. However, income diversification does not lower volatility risks during crisis times. The study shows that increasing the cost efficiencies, higher liquidity and leverage ratios positively affects profitability and reduces volatility risk during the non-crisis period. The net interest margin positively influences risk during and after a crisis. The results show that GDP positively connects to a bank’s profitability. The link between profitability and inflation varies based on the analysis’s emphasis (i.e., before, during or after the crisis) and income level (i.e., low income or middle income). This study’s results have significant implications for bankers, regulators and the banking literature on the determinant, merits and risks of income diversification.