Income Diversification, Bank Volatility Risk and Performance in Low- and Middle-income African Countries: Evidence from Normal and Crisis Periods

Abstract

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.