Journal of Economics and Financial Analysis, 3 (2), pp. 1-21, [2019]
URI: https://ojs.tripaledu.com/jefa/article/view/47/55

Income Diversification, Market Power and Performance


Moi University, Kenya


DOI: http://dx.doi.org/10.1991/jefa.v3i2.a26

Abstract

This paper aims at examining the mediating role of market power on income diversification and performance nexus. Using 310 yearly observations drawn from a sample of 31 Kenyan commercial banks and panel data for the 2008–2017 periods, the study finds that market power significantly mediate the relationship between income diversification and performance. Thus, income diversification will have a larger impact on performance for banks with significantly high market power compared to those with low market power. Given the novelty of these findings, the study has implications for bank regulators, scholars and practitioners.

Keywords

Income diversification; Non-interest income; Market power; Firm performance; Herfindahl-Hirschman Index.

JEL Classification

G11, G21.

Full Text:

PDF
HTML

References

Abdin, J. (2016). Financial development and poverty reduction: Exploring the links between the issues using evidence from Bangladesh. International Journal of Financial Research, 7(4), pp. 44-65.

Abedifar, P., Molyneux, P., & Tarazi, A. (2014). Non-Interest Income Activities and Bank Lending. Working Paper Responsible Banking and Finance, No: 15-002.

Alhassan, A.L., & Tetteh, M.L. (2017). Non-Interest Income and Bank Efficiency in Ghana: A Two-Stage DEA Bootstrapping Approach. Journal of African Business, 18(1), pp. 124-142.

Al-Jarrah, I.M. (2010). The market structure-profit relationship in Jordan's banking industry. Dirasat, Administrative Sciences, 37(1), pp. 251-261.

Anetor, F., Ogbechie, C., Kelikume, I., & Ikpesu, F. (2016). Credit supply and agricultural production in Nigeria: A vector autoregressive (VAR) approach. Journal of Economics and Sustainable Development, 7(2).

Awwad, B.S.A. (2018). Market power and performance: An Islamic banking perspective. Corporate Ownership & Control, 15(3-1), pp. 163-171. DOI: 10.22495/cocv15i3c1p2

Balcilar, M., Gupta, R., Lee, C.C., & Olasehinde-Williams, G. (2018). The synergistic effect of insurance and banking sector activities on economic growth in Africa. Economic Systems, 42(4), pp. 637-648.

Barney, J.B. (1986). Organizational culture: Can it be a source of sustained competitive advantage? Academy of management review, 11(3), pp.656-665.

Baron, R.M., & Kenny, D.A. (1986). The moderator-mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of personality and social psychology, 51(6), pp. 1173-1182.

Batool, S., & Jamil, F. (2019). Rural employment and income diversification in Pakistan. Pakistan Journal of Agricultural Sciences, 56(2).

Beck, T., Demirguc-Kunt, A. and Levine, R. (2007). Finance, inequality and the poor. Journal of Economic Growth, 12(1), pp. 27-49.

Berger, A.N., Hasan, I., & Zhou, M. (2010). The effects of focus versus diversification on bank performance: Evidence from Chinese banks. Journal of Banking & Finance, 34(7), pp. 1417-1435.

Brahmana, R., Kontesa, M., & Gilbert, R.E. (2018). Income diversification and bank performance: evidence from Malaysian banks. Economics Bulletin, 38(2), pp. 799-809.

Brissimis, S.N., & Kosma, T.S. (2007). Market power and exchange rate pass-through. International Review of Economics & Finance, 16(2), pp.202-222.

Busch, R. and Kick, T. (2009). Income Diversification in the German Banking Industry, Deutsche Bundesbank Euro system. Discussion Paper. Series 2: Banking and Financial Studies. No: 09/2009.

Bustos, P., Garber, G., & Ponticelli, J. (2016). Capital allocation across sectors: Evidence from a boom in agriculture. Banco Central do Brasil, No: 414.

Cai, D., Song, Q., Ma, S., Dong, Y., & Xu, Q. (2018). The relationship between credit constraints and household entrepreneurship in China. International Review of Economics & Finance, 58, pp. 246-258.

Calmes, C., & Theoret, R. (2015). Product-mix and bank performance: new US and Canadian evidence. Managerial Finance, 41(8), pp. 773-805.

Carroll, D. A., & Stater, K. J. (2008). Revenue diversification in nonprofit organizations: Does it lead to financial stability? Journal of Public Administration Research and Theory, 19(4), pp. 947-966.

Caruana, E.J., Roman, M., Hernandez-Sanchez, J., & Solli, P. (2015). Longitudinal studies. Journal of Thoracic Disease, 7(11), pp. 537-540. DOI: 10.3978/j.issn.2072-1439.2015.10.63

Casu, B., & Girardone, C. (2009). Testing the relationship between competition and efficiency in banking: A panel data analysis. Economics Letters, 105(1), pp. 134-137.

Chen, C.R., Huang, Y.S., & Zhang, T. (2017). Non-interest Income, trading, and bank risk. Journal of Financial Services Research, 51(1), pp. 19-53.

Chen, G.Z., & Keung, E.C. (2018). Corporate diversification, institutional investors and internal control quality. Accounting & Finance, 58(3), pp. 751-786.

Chen, Y.H., & Lai, P.L. (2017). Does diversification promote risk reduction and profitability raise? Estimation of dynamic impacts using the pooled mean group model. Journal of Applied Statistics, 44(10), pp. 1893-1901.

Chiorazzo, V., Milani, C., & Salvini, F. (2008). Income diversification and bank performance: Evidence from Italian banks. Journal of Financial Services Research, 33(3), pp. 181-203.

Choi, B.P., & Weiss, M.A. (2005). An empirical investigation of market structure, efficiency, and performance in property‐liability insurance. Journal of Risk and Insurance, 72(4), pp. 635-673.

Chortareas, G.E., Garza‐Garcia, J.G., & Girardone, C. (2011). Banking sector performance in Latin America: Market power versus efficiency. Review of Development Economics, 15(2), pp. 307-325.

Delis, M.D., & Tsionas, E.G. (2009). The joint estimation of bank-level market power and efficiency. Journal of Banking & Finance, 33(10), pp. 1842-1850.

Delpachitra, S., & Lester, L. (2013). Non‐Interest Income: Are Australian Banks Moving Away from their Traditional Businesses? Economic Papers: A Journal of Applied Economics and Policy, 32(2), pp. 190-199.

Demirguc-Kunt, A., & Huizinga, H. (1999). Determinants of commercial bank interest margins and profitability: some international evidence. The World Bank Economic Review, 13(2), pp. 379-408.

DeYoung, R., & Rice, T. (2004). Non-interest income and financial performance at US commercial banks. Financial Review, 39(1), pp. 101-127.

DeYoung, R., & Roland, K.P. (2001). Product mix and earnings volatility at commercial banks: Evidence from a degree of total leverage model. Journal of Financial Intermediation, 10(1), pp. 54-84.

Dietrich, A., & Wanzenried, G. (2014). The determinants of commercial banking profitability in low-, middle-, and high-income countries. The Quarterly Review of Economics and Finance, 54(3), pp. 337-354.

Dimitrios, A., Helen, L., & Mike, T. (2016). Determinants of non-performing loans: Evidence from Euro-area countries. Finance Research Letters, 18, pp. 116-119, DOI: 10.1016/j.frl.2016.04.008

Dwyer, R.E. (2018). Credit, debt, and inequality. Annual Review of Sociology, 44, pp. 237-261.

Ebrahim, A., & Hasan, I. (2008). The value relevance of product diversification in commercial banks. Review of Accounting and Finance, 7(1), pp. 24-37.

Edirisuriya, P., Gunasekarage, A., & Dempsey, M. (2015). Australian Specific Bank Features and the Impact of Income Diversification on Bank Performance and Risk. Australian Economic Papers, 54(2), pp. 63-87.

Eklof, J., Podkorytova, O., & Malova, A. (2018). Linking customer satisfaction with financial performance: An empirical study of Scandinavian banks. Total Quality Management & Business Excellence, pp. 1-19.

Elsas, R., Hackethal, A., & Holzhauser, M. (2010). The anatomy of bank diversification. Journal of Banking & Finance, 34(6), pp. 1274-1287.

Fang, Y., & van Lelyveld, I. (2014). Geographic diversification in banking. Journal of Financial Stability, 15, pp. 172-181.

Ferrari, A., Masetti, O., & Ren, J. (2018). Interest rate caps: The theory and the practice. Policy, Research Working Paper, No.WPS 8398, World Bank, Washington, DC.

Fofack, H.L. (2005). Non-performing loans in Sub-Saharan Africa: causal analysis and macroeconomic implications. Policy, Research Working Paper, No.WPS 3769, World Bank, Washington, DC.

Fornell, C., Mithas, S., Morgeson III, F.V., & Krishnan, M.S. (2006). Customer Satisfaction and Stock Prices: High Returns, Low Risk. Journal of Marketing, 70, pp. 3-16. DOI: 10.1509/ jmkg.2006.70.1.3.

Ghosh, A. (2015). Banking-industry specific and regional economic determinants of non-performing loans: Evidence from US states. Journal of Financial Stability, 20(C), pp. 93-104.

Goksu, A., & Goksu, G.G. (2015). A comparative analysis of higher education financing in different countries. Procedia Economics and Finance, 26, pp. 1152-1158.

Gololo, I.A. (2018). Challenges of the Nigerian Banking Sector and the Way Forward. American Finance & Banking Review, 3(1), pp. 26-34.

Griffiths, W., Jensen, P.H., & Webster, E. (2011). What creates abnormal profits? Scottish Journal of Political Economy, 58(3), pp. 323-346.

Gurbuz, A.O., Yanik, S., & Ayturk, Y. (2013). Income diversification and bank performance: Evidence from Turkish banking sector. Journal of BRSA Banking and Financial Markets, 7(1), pp. 9-29.

Hahm, J. (2008). Non-interest income of commercial banks: evidence from OECD countries. BOK Working Paper, No: 330. The Bank of Korea.

Honohan, P. (2004). Financial development, growth and poverty: how close are the links? In C.A.E. Goodhart (ed.), Financial Development and Economic Growth (pp.1-37). Palgrave Macmillan, London

Ilaboya, O.J., & Ohiokha, I.F. (2016). Bank age, Size and Profitability dynamics: A test of learning by doing and structural inertia hypotheses. Business and Management Research, 5(1), pp. 29-39. DOI: 10.5430/bmr.v5n1p29

Jouida, S. (2018). Diversification, capital structure and profitability: A panel VAR approach. Research in International Business and Finance, 45, pp. 243-256.

Khan, S.J.M., & Anuar, A.R. (2018). Access to Finance: Exploring Barriers to Entrepreneurship Development in SMEs. In N. Zakaria and L.A. Kaushal (eds.), Global Entrepreneurship and New Venture Creation in the Sharing Economy (pp. 92-111). IGI Global.

Khanna, N., & Tice, S. (2001). The bright side of internal capital markets. The Journal of Finance, 56(4), pp. 1489-1528.

Kiweu, J. (2012). Income diversification in the banking sector and earnings volatility: Evidence from Kenyan commercial banks. KBA centre for Research on Financial Markets and Policy, Working paper series, (2).

Klein, N. (2013). Non-performing loans in CESEE: Determinants and impact on macroeconomic performance. IMF Working Papers 13/72. International Monetary Fund.

Laeven, L., & Levine, R. (2007). Is there a diversification discount in financial conglomerates? Journal of Financial Economics, 85(2), pp. 331-36.

Landskroner, Y., Ruthenberg, D., & Zaken, D. (2005). Diversification and performance in banking: The Israeli Case. Journal of Financial Services Research, 27(1), pp. 27-49.

Laryea, E., Ntow-Gyamfi, M., & Alu, A.A. (2016). Nonperforming loans and bank profitability: evidence from an emerging market. African Journal of Economic and Management Studies, 7(4), pp. 462-481.

Lei, Q., & Chen, H. (2019). Corporate Governance Boundary, Debt Constraint, and Investment Efficiency. Emerging Markets Finance and Trade, 55(5), pp. 1091-1108

Lepetit, L., Nys, E., Rous, P., & Tarazi, A. (2008). Bank income structure and risk: An empirical analysis of European banks. Journal of Banking & Finance, 32(8), pp. 1452-1467.

Liu, C., Reichert, A., & Gramlich, D. (2013). Diversification channels and bank holding company performance. Journal of Accounting and Finance, 13(2), pp. 109-124.

Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), pp. 77-91.

Matsusaka, J.G. (2001). Corporate diversification, value maximization, and organizational capabilities. The Journal of Business, 74(3), pp. 409-431.

Mohamed, A.I., & Bett, S. (2018). Strategic resources and performance of commercial banks in Kenya: Case of Equity Bank Limited. International Academic Journal of Human Resource and Business Administration, 3(3), pp. 218-242.

Montgomery, C.A., & Wernerfelt, B. (1988). Diversification, Ricardian rents, and Tobin's q. The Rand Journal of Economics, 19(4), pp. 623-632.

Mudavadi, C., & Weber, C. (2013). Safaricom Kenya Ltd: 2000 to 2010. 2013 Proceedings of PICMET'13: Technology Management in the IT-Driven Services (PICMET), pp. 88-96. IEEE.

Mujeri, M.K., & Younus, S. (2009). An analysis of interest rate spread in the banking sector in Bangladesh. The Bangladesh Development Studies, pp. 1-33.

Mwega, F.M. (2009). Global financial crisis discussion series. Overseas Development Institute.

Nepali, S.R. (2018). Income diversification and bank risk-return trade-off on the Nepalese commercial banks. Asian Economic and Financial Review, 8(2), pp. 279-293.

Nickell, S., Wadhwani, S., & Wall, M. (1992). Productivity growth in UK companies, 1975–1986. European Economic Review, 36(5), pp. 1055-1085.

Olaka, H. (2017). The Capping Interest Rates Debate: Market Failure or Necessary Intervention? Presentation at the 25th ICPAK Economic Symposium, 16th February 2017 Chief Executive Officer, Kenya Bankers Association

Olarewaju, O.M. (2018). Income Diversification in Low Income Sub-Saharan African Countries’ Commercial Banks: A “Blessing” or “Curse”? Folia Oeconomica Stetinensia, 18(2), pp. 90-105.

Ovi, N.Z., Perera, S., & Colombage, S. (2014). Market power, credit risk, revenue diversification and bank stability in selected ASEAN countries. South East Asia Research, 22(3), pp. 399-416.

Paelo, A. (2014). Mobile money: taking on the big banks. CCRED Quarterly Competition Review, 10.

Peteraf, M.A. (1993). The cornerstones of competitive advantage: A resource‐based view. Strategic Management Journal, 14(3), pp. 179-191.

Prahalad, C.K., & Hamel, G. (1990). The core competence of the corporation. Harvard Business Review, 68, pp. 79-91.

Preacher, K.J., & Hayes, A.F. (2004). SPSS and SAS procedures for estimating indirect effects in simple mediation models. Behavior Research Methods, Instruments, & Computers, 36, pp. 717-731.

Psillaki, M., & Mamatzakis, E. (2017). What drives bank performance in transitions economies? The impact of reforms and regulations. Research in International Business and Finance, 39, pp. 578-594.

Pucheta‐Martinez, M.C., & Bel‐Oms, I. (2019). What have we learnt about board gender diversity as a business strategy? The appointment of board sub-committees. Business Strategy and the Environment, 28(2), pp. 301-315.

Sanya, S. and Wolfe, S. (2011). Can Banks in Emerging Economies Benefit from Revenue Diversification? Journal of Financial Services Research. 40, pp. 79- 101.

Saunders, A., Schmid, M., & Walter, I. (2016). Non-Interest Income and Bank Performance: Does Ring-Fencing Reduce Bank Risk? (No. 1417). University of St. Gallen, School of Finance.

Schaeck, K., & Cihak, M. (2014). Competition, efficiency, and stability in banking. Financial management, 43(1), pp. 215-241.

Schoenmaker, D., & Wagner, W. (2011). The impact of cross-border banking on financial stability (No. 11-054/2/DSF18). Tinbergen Institute Discussion Paper.

Shih, C.H., Wu, C.C., & Yang, T.H. (2018). Diversification, Internal Capital Market, and Information Advantage. IMF Working Papers, WP/19/111

Sikod, F., & Baye, M. (2015). Microfinance Access and Poverty Reduction in Cameroon. La microfinance en Afrique centrale: Le défi des exclus, 253.

Stein, J.C. (2002). Information production and capital allocation: Decentralized versus hierarchical firms. The Journal of Finance, 57(5), pp. 1891-1921.

Stiroh, K.J. (2004). Diversification in banking: Is non-interest income the answer? Journal of Money, Credit and Banking, 36(5), pp. 853-882.

Sufian, F., & Chong, R.R. (2008). Determinants of bank profitability in a developing economy: Empirical evidence from the Philippines. Asian Academy of Management Journal of Accounting & Finance, 4(2), pp. 91-112.

Sun, S.T., & Yannelis, C. (2016). Credit constraints and demand for higher education: Evidence from financial deregulation. Review of Economics and Statistics, 98(1), pp. 12-24.

Teece, D.J. (2007). Explicating dynamic capabilities: the nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13), pp. 1319-1350.

Toms, S., Wilson, N., & Wright, M. (2019). Innovation, intermediation, and the nature of entrepreneurship: A historical perspective. Strategic Entrepreneurship Journal, pp. 1-17. DOI: 10.1002/sej.1310

Tongurai, J., & Vithessonthi, C. (2018). The impact of the banking sector on economic structure and growth. International Review of Financial Analysis, 56, pp. 193-207.

Valla, N., Saes-Escorbiac, Beatrice & Tiesset, Muriel. (2006). Bank liquidity and financial stability. Banque de France Financial Stability Review, 9, pp. 89-104.

Van Vu, H., Tran, T.Q., Van Nguyen, T., & Lim, S. (2018). Corruption, types of corruption and firm financial performance: New evidence from a transitional economy. Journal of Business Ethics, 148(4), pp. 847-858.

Wan, G., & Zhang, Y. (2018). The direct and indirect effects of infrastructure on firm productivity: Evidence from Chinese manufacturing. China Economic Review, 49, pp. 143-153.

Waweru, N.M., & Kalani, V.M. (2009). Commercial Banking Crises in Kenya: Causes and Remedies. African Journal of Accounting, Economics, Finance & Banking Research, 4(4).

Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 5(2), pp. 171-180.

Williamson, S.D. (1986). Costly monitoring, financial intermediation, and equilibrium credit rationing. Journal of Monetary Economics, 18(2), pp. 159-179.

Zhang, D., Cai, J., Dickinson, D.G., & Kutan, A.M. (2016). Non-performing loans, moral hazard and regulation of the Chinese commercial banking system. Journal of Banking & finance, 63, pp. 48-60.

Zhao, X., Lynch Jr, J G., & Chen, Q. (2010). Reconsidering Baron and Kenny: Myths and truths about mediation analysis. Journal of consumer research, 37(2), pp. 197-206.

Zikmund, W.G., Babin, B.J., Carr, J.C., & Griffin, M. (2013). Business research methods. 9th Edition. Cengage Learning.




Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.