Diversification, bank performance and risk: have Tunisian banks adopted the new business model?

Abstract

Background: The objective of this paper is threefold. First, we test the most important factors that determine the level of non-interest income for Tunisian banks. Second, we study the impact of non-interest income on banks' profitability measured by both return on assets (ROA) and return on equity (ROE). Finally, we investigate the relationship between non-interest income and the level of risk taking. Methods: To achieve this goal, we used annual data of 20 Tunisian banks during the period 2005-2012. In the empirical section we performed a Dynamic Panel Data model. Results: Empirical results indicate that the main determinants of non-interest income are: relative performance (RROA and RROE), bank size, loan specialization and new epayments channels, automatic teller machine (ATM) and credit cards). We also find that diversification increases bank performance for both ROA and ROE measures. Eventually, non-interest income appears to be negatively and significantly correlated with the effect on the level of risk. Conclusions: Tunisian banks are invited to more diversify their activities and do not focus only on the traditional activity. The noninterest income seems to be associated with a higher level of profitability and a lower risk.

Do service activity impact on the risk of Indonesian banking industry?

“…In Table 1, we can see from the results of Models (1a) that non-financing income (NFI) has a negative and significant relationship with risk (DER), which is consistent with [5,7,9,16,18]. The result shows that the increase of non-financing income will decrease the risk level so that banking service activity must be maximized.…”

“…The study [19] shows that non-interest income as a whole is reducing bank risk in South Asia. Diversification is important because it increases bank income and also decreases the possibility of such pressure as the bank crisis [7]. Research conducted by Ekanayake and Wanamalie [4] found that risk-adjusted return on equity is positively influenced by higher non-interest income activities, indicating that a marginal increase in non-interest income increases trade-off shareholder risk.…”

Size, efficiency, market power, and economies of scale in the African banking sector

“…Over the decade since the 2008 financial crisis, the literature on banking and finance has seen renewed interest in a number of areas, including the nexus between loan growth, regulation, diversification, and competition, and the development indicators for risk, capital management, and efficiency of banks (Kashif et al 2016;Bokpin 2016;Fanta 2016;Zheng et al 2017;Ozili 2017;Khraisha and Arthur 2018). Interest has also grown regarding banking industry performance in terms of allocation efficiency, risk management and profitability (Moudud-Ul-Huq 2017; Hamdi et al 2018), the application of manifold learning approaches (Huang and Kou 2014;Yan et al 2017), and the implications of Basel III for banking sector development (Ramlall and Mamode 2017).…”

Assessing the Indonesian Banking Risk: A Comparative Study between Islamic and Conventional Banks

“…Therefore, the following hypothesis is developed: H1: Islamic banks are different from conventional banks model A research of Karanja (2012) shows that higher non-interest income is associated with lower risk. Similarly, Hamdi et al (2017) show that diversification enhances bank income and reduces the potential of bank crises. In addition, non-interest income has a negative and significant correlation with risk.…”

“…The conventional views that diversification strategies as the cost-based income sources can reduce the bank risk (Moudud-Ul-Huq, Ashraf, Gupta, & Zheng, 2018). Diversification increases bank income and reduces bank crises (Hamdi, Hakimi, & Zaghdoudi, 2017). The effect of product diversification on bank risk is related to asset size (Hidayat, Kakinaka, & Miyamoto, 2012).…”