Abstract
The study explores the determinants of income diversification, as well as, test for the existence of beta-convergence and sigma-convergence among Ghanaian banks. The study utilizes a dataset of 32 banks covering the periods 2000 to 2017. The panel corrected standard error ordinary least squares, fixed effects and system generalized methods of moments have been used. Both beta-convergence and sigma-convergence exist among Ghanaian banks; suggesting the presence of the catch-up effect and similarity of strategy over time. The risk profile and risk portfolio of banks affect their diversification strategy. Banks that are faced with high insolvency risk and liquidity risk tend to diversify while banks that are faced with low credit risk tend to diversify. Stable banks tend to adopt a diversification strategy even when they are exposed to credit risk. Network embeddedness drives diversification strategy. The implications of the study for practice, policy, and future research have been discussed.
Highlights
Banks are shifting their revenue models from the traditional financial intermediation business to non-interest activities such as consulting and brokerage
Using the convergence models based on the neoclassical growth model, the study found that both beta-convergence and sigma-convergence of income diversification exist among Ghanaian banks
The results indicate that factors such as cost of production, equity to the asset, market share, foreign stake and banking asset to the gross domestic product have a positive effect on income diversification
Summary
Banks are shifting their revenue models from the traditional financial intermediation business to non-interest activities such as consulting and brokerage. The counter assertion to these is that allowing few regulations enable banks to benefit from economies of scope (Claessens & Klingebiel, 2001) Following these arguments, various studies have explored the impact of income diversification on profitability or risk. Despite reforms over the years, the non-performing loans increased leading to liquidity problems, solvency problems, efficiency weaknesses with the possibility of systemic risk that could affect the whole economy This resulted in the capture of a financial sector clean-up in the political manifesto during the 2016 election and subsequently among key policy preferences. Using the convergence models based on the neoclassical growth model, the study found that both beta-convergence and sigma-convergence of income diversification exist among Ghanaian banks The evidence of this catch-up effect suggests that less diversified banks increase their level of diversification more than the diversified banks. The penultimate section concludes the study and the last section provides insightful implications of the study for policy, practice and future research
Sign-in/Register to view highlights & summary 
Published Version (
Free)
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call