Is Bank Income Diversification Beneficial? Evidence from an Emerging Economy

42 Pages Posted: 23 Feb 2010 Last revised: 11 Jun 2013

See all articles by Céline Meslier

Céline Meslier

Universite de Limoges, LAPE

Ruth C. Tacneng

Université de Limoges, LAPE

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Date Written: April 3, 2013

Abstract

This paper examines the impact of bank revenue diversification on the performance of banks in an emerging economy. Using a unique dataset with detailed information on non-interest income, our findings show that, conversely to studies on Western economies, a shift towards non-interest activities increases bank profits and risk-adjusted profits particularly when they are more involved in trading in government securities. Our results also indicate that foreign banks benefit more from such a shift than their domestic counterparts. Moreover, we account for the institutional and regulatory environment advocating loans to SMEs and find that higher involvement in non-interest activities is only beneficial for banks with low exposures to SMEs. Our findings have important policy implications in terms of achieving optimal diversification and lower risk exposure, which might conflict with policies aiming to promote SME lending.

Keywords: Emerging economies, Bank Revenue Diversification, Bank Risk and Profitability

JEL Classification: G21, G28

Suggested Citation

Meslier, Celine and Tacneng, Ruth C. and Tarazi, Amine, Is Bank Income Diversification Beneficial? Evidence from an Emerging Economy (April 3, 2013). Available at SSRN: https://ssrn.com/abstract=1557010 or http://dx.doi.org/10.2139/ssrn.1557010

Celine Meslier

Universite de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

Ruth C. Tacneng

Université de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

Amine Tarazi (Contact Author)

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

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