Market Power, Types of Ownership and Bank Income Diversification: Cases of Asian Countries

Valentino Robertho,Buddi Wibowo

doi:10.15294/jdm.v9i1.14648

Abstract

This study aims to analyze the effects of market power and type of ownership on bank’s income diversification in Indonesia, Malaysia, the Philippines, Thailand, and China. Banks diversifies their source of income to stabilize profitability level. Bank’s market power is a critical factor which affect its income diversification efforts. This study uses Lerner Index as a proxy for banks’ market power. By using a sample of 80 banks in five countries from 2012 to 2016 and operating Fixed Effect Model and Generalized Least Square, the result shows that banks with greater market power earn more non-interest income, except in the Philippines. Also, government ownership is proven to heighten the relation between market power and income diversification, with consistent results shown in each subsamples. Foreign ownership also heighten the relation between market power and income diversification, except in Thailand.

Highlights

As an intermediary financial institution, banks carry out several activities, from raising funds from society with excess liquidity, to channeling credits and issuing letters of credit. Pennathur et al (2012) states that in general, banks’ revenues come from two sources, traditional and non-traditional activities
Macroeconomic data are obtained from World Bank’s official website. We find those that have necessary information are 80 banks, 34 banks are Indonesian, 9 banks are Malaysian banks, 13 banks are from the Philippines, 11 banks are from Thailand, and 13 banks are from China
At a certain level of market power, banks owned by government obtain higher non-interest income compared to private banks

Summary

Introduction

As an intermediary financial institution, banks carry out several activities, from raising funds from society with excess liquidity (in the forms of deposits, current accounts, or savings), to channeling credits and issuing letters of credit. Pennathur et al (2012) states that in general, banks’ revenues come from two sources, traditional and non-traditional activities. Hypothesis Development Some experts state market power is a crucial factor that stimulates a bank to identify new opportunities to develop non-traditional activities and will increase its non-interest income (Berger et al, 2009, Nguyen et al, 2016). Social view that states that government-owned banks have more incentives to allocate their resources into projects that are socially profitable will tend to diversify their sources of income into non-traditional activities (Maudos et al, 2007). ‘home field advantage’ view on the contrary states that foreign banks are less efficient in running both traditional and non-traditional activities compared to domestic banks whose better information about economic condition, language, legal, and politics of their countries (Berger et al, 2009).

AND DISCUSSION

CONCLUSION AND RECOMMENDATION