Income Diversification and Bank Performance: Does Bank Size Matter? Empirical Evidence from African Banking Sector

Abstract

This paper investigates the effect of income diversification on bank’s risk-adjusted performance. The fixed effect panel regression is used in this study with a panel dataset of 390 banks from 49 different African countries over the period of 2012 to 2019. Our results provide empirical evidence that income diversification increases risk-adjusted performance of commercial banks in Africa. However, the relation varies across bank size. Specifically, we find that this relation is stronger at larger banks. In addition, larger banks can make important gains from increasing non-interest income. However, we find limits to diversification benefits at smaller banks in Africa.

Keywords: income diversification, non-interest income, bank performance, African banking sector

DOI: 10.7176/RJFA/12-16-03

Publication date:August 31^st 2021