Do the diversification of income and assets spur bank profitability in Bangladesh? A dynamic panel data analysis

Mohammad Jashim Uddin,Aklima Akter,Rabaya Zaman,Md Tofael Hossain Majumder

doi:10.1108/xjm-01-2021-0023

Mohammad Jashim Uddin, Aklima Akter + Show 2 more

Open Access

https://doi.org/10.1108/xjm-01-2021-0023

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Abstract

Purpose This paper aims to explore the effects of bank diversification (i.e. diversification of income and diversification of assets) on Bangladeshi banks’ profitability. Design/methodology/approach Using a dynamic panel data model with system generalized methods of moments, the authors examine an unbalanced panel data from 32 banks spanning 318 bank-year observations from 2007 to 2016. Findings The findings indicate a significant positive association of income diversification and asset diversification on bank profitability. Therefore, the results show that banks can generate profit from diversification of income and diversification of assets. Originality/value One of the rare attempts to investigate the relationship between diversification and profitability in Bangladesh’s banking sector is this report. The authors anticipate the results to have major consequences for Bangladeshi bank regulators and other related economies.

Highlights

The financial sector, especially the banking sector in developing countries as well as in developed countries, has undergone major changes over the past few decades
We find that the average return on assets (ROA) of Bangladeshi banks is 1.1%, which is higher than 0.93% as Authors and year Country
The findings of the analysis indicate that income diversification (IDIV) has a positive and significant effect on the profitability of Bangladeshi commercial banks in all models, suggesting that more diversified non-income generating activities contribute to higher profitability and the results supported by the research by Jiang et al (2003)

Summary

Introduction

The financial sector, especially the banking sector in developing countries as well as in developed countries, has undergone major changes over the past few decades. Because of globalization, growing competitiveness and deregulation, banks have strengthened their attention to diversified business lines in addition to conventional bank interest-based operations. Nowadays, owing to the evolving business scenario, noninterest-based activities are more popular among banks in earning a profit. Most previous research shows that noninterest income (NII) yields a higher return; it causes danger because of its volatility (Moudud-Ul-Huq et al., 2018). By investigating South Asian banks, Nguyen et al (2012b) suggest that if banks diversify their revenue from all interest and noninterest streams, they will become more resilient. Previous research has shown that the correlation between diversification and bank profitability is inconclusive. We have implemented two research questions on the Bangladeshi banking industry: What are the impacts on bank profitability of income diversification? We have implemented two research questions on the Bangladeshi banking industry: What are the impacts on bank profitability of income diversification? Is there any significant relationship between the diversification of assets and the profitability of banks?

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