Revenue Diversification and Quality of Loan Portfolio

• Autorzy: Peter Nderitu Githaiga
• Języki publikacji: EN

Abstrakty

EN

Aim/purpose - This paper aims at examining the impact of revenue diversification on the quality of loan portfolio. The interest has been stimulated by the growing appetite for nontraditional activities among banks due to the declining interest income and rising nonperforming loans. Design/methodology/approach - The study considers a sample of 67 countries and quarterly banking sector financial reports over the period 2016Q1-2018Q4.The data are extracted from the International Monetary Fund Financial Soundness Indicators (FSI) database and are analysed through fixed effect regression as supported by the Hausman test. Findings - The study finds that revenue diversification impairs the quality of the loan portfolio. The findings are attributable to loss of focus, lack of expertise in managing non-lending activities, and possible agency problems. Moreover, the study controls for several banking sector-specific factors that affect the quality of loan portfolio. The results show that credit growth and banking sector performance improve the quality of loan portfolio quality. However, the banking sector capitalisation and cost efficiency lower the loan portfolio rate, but the banking sector size has no significant effect. Research implications/limitations - Based on the findings, the study recommends that practitioners and regulators focus on innovative loans appraisal and monitoring practices instead of diversifying into non-interest generating activities. Originality/value/contribution - Unlike previous studies that focused on the relationship between income diversification and bank performance, this study contributes to the literature by examining the relationship between revenue diversification and quality of loan portfolio, thus bringing in a new insight into the bank revenue diversification debate. (original abstract)

Słowa kluczowe

EN

Credit portfolio; Banking sector; Revenue; Portfolio diversification

PL

Portfel kredytowy; Sektor bankowy; Przychody; Dywersyfikacja portfela

• Czasopismo: Journal of Economics & Management / University of Economics in Katowice
• Rocznik: 2020
• Numer: nr 42
• Strony: 5--19

Twórcy

autor

Peter Nderitu Githaiga

• Moi University, Eldoret, Kenya

Bibliografia

• 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), 44-65. https://doi.org/10.5430/ijfr.v7n4p44 1.
• Abedifar, P., Molyneux, P., & Tarazi, A. (2014). Non-interest income activities and bank lending (Working Paper Responsible Banking and Finance, No. 15-002). Retrieved from https://hal.archives-ouvertes.fr/hal-00947074/file/Nonintererst_Income_and_ Banki_Lending26August2014.pdf
• Abid, L., Ouertani, M. N., & Zouari-Ghorbel, S. (2014). Macroeconomic and bank-specific determinants of household's non-performing loans in Tunisia: A dynamic panel data. Procedia Economics and Finance, 13, 58-68. https://doi.org/10.1016/ S2212-5671(14)00430-4
• Akinlo, O., & Emmanuel, M. (2014). Determinants of non-performing loans in Nigeria. Accounting & Taxation, 6(2), 21.
• Amuakwa-Mensah, F., & Boakye-Adjei, A. (2015). Determinants of non-performing loans in Ghana banking industry. International Journal of Computational Econom- ics and Econometrics, 5(1), 35-54. https://doi.org/10.1504/IJCEE.2015.066207
• Anastasiou, D., Louri, H., & Tsionas, M. (2019). Nonperforming loans in the euro area: Are core-periphery banking markets fragmented? International Journal of Finance & Economics, 24(1), 97-112. https://doi.org/10.1002/ijfe.1651
• 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), 637-648. https://doi.org/10.1016/j.ecosys.2018.08.002
• Beccalli, E., Anolli, M., & Borello, G. (2015). Are European banks too big? Evidence on economies of scale. Journal of Banking & Finance, 58, 232-246. https://doi.org/ 10.1016/j.jbankfin.2015.04.014
• Berger, A., & DeYoung, R. (1997). Problem loans and cost efficiency in commercial banks. Journal of Banking and Finance, 21, 849-870. https://doi.org/10.1016/S0 378-4266(97)00003-4
• Brahmana, R., Kontesa, M., & Gilbert, R. E. (2018). Income diversification and bank performance: Evidence from Malaysian banks. Economics Bulletin, 38(2), 799-809.
• Brighi, P., & Venturelli, V. (2014). How do income diversification, firm size and capital ratio affect performance? Evidence for bank holding companies. Applied Financial Economics, 24(21), 1375-1392. https://doi.org/10.1080/09603107.2014.925064
• Busch, R., & Kick, T. (2009). Income diversification in the German banking industry, Deutsche Bundesbank euro system (Discussion Paper. Series 2: Banking and Financial Studies, No. 09). Berlin: Deutsche Bundesbank.
• Bustos, P., Garber, G., & Ponticelli, J. (2016). Capital allocation across sectors: Evi- dence from a boom in agriculture (Working Paper Series, No. 414). Brasilia: Banco Central do Brasil.
• Chiorazzo, V., Milani, C., & Salvini, F. (2008). Income diversification and bank performance: Evidence from Italian banks. Journal of Financial Services Research, 33(3), 181-203.
• Cosci, S., Meliciani, V., & Sabato, V. (2012). Cross-selling, information synergies and the quality of banks' loans. Paper prepared for the SIE Conference, 18-20 October 2012, University of Basilicata, Matera. Retrieved from https://www.siecon.org/ sites/siecon.org/files/oldfiles/uploads/2012/08/Cosci-Meliciani-Sabato.pdf
• Dwyer, R. E. (2018). Credit, debt, and inequality. Annual Review of Sociology, 44. 237-261. https://doi.org/10.1146/annurev-soc-060116-053420
• Financial Soundness Indicators [FSIs]. (2007-2017). Washington, DC: IMF. Retrieved September 25, 2019 http://data.imf.org/?sk=51B096FA-2CD2-40C2-8D09-0699 CC1764DA&sId=1411569045760/
• Foos, D., Norden, L., & Weber, M. (2010). Loan growth and riskiness of banks. Journal of Banking & Finance, 34(12), 2929-2940.
• Ghosh, A. (2015). Banking-industry specific and regional economic determinants of non-performing loans: Evidence from US states. Journal of Financial Stability, 20, 93-104. https://doi.org/10.1016/j.jfs.2015.08.004
• Gulati, R., Goswami, A., & Kumar, S. (2019). What drives credit risk in the Indian banking industry? An empirical investigation. Economic Systems, 43(1), 42-62. https://doi.org/10.1016/j.ecosys.2018.08.004
• 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), 9-29.
• Hasanov, F., Bayramli, N., & Al-Musehel, N. (2018). Bank-specific and macroeconomic determinants of bank profitability: Evidence from an oil-dependent economy. International Journal of Financial Studies, 6(3), 78. https://doi.org/10.3390/ ijfs6030078
• Honohan, P. (2004). Financial development, growth and poverty: How close are the links? In C. Goodhart (Ed.), Financial development and economic growth (pp. 1-37). London: Palgrave Macmillan. https://doi.org/10.1057/9780230374270
• Hou, Y., & Dickinson, D. (2007, August). The non-performing loans: Some bank-level evidences (4th International Conference on Applied Financial Economics, Samos Island, Greece). Retrieved from https://www.semanticscholar.org/paper/The-Non- performing-Loans-:-Some-Bank-level-Hou- Dickinson/5aa08af6c926fdbb82a8be8688564832987244b8
• Hu, J. L., Li, Y., & Chiu, Y. H. (2004). Ownership and nonperforming loans: Evidence from Taiwan's banks. The Developing Economies, 42(3), 405-420. https://doi.org/ 10.1111/j.1746-1049.2004.tb00945.x
• Jolevska, E., & Andovski, I. L. (2015). Non-performing loans in the banking systems of Serbia, Croatia and Macedonia: Comparative analysis. Ekonomika, 61(1), 115-130. https://doi.org/10.22004/ag.econ.200275
• Klein, N. (2013). Non-performing loans in CESEE: Determinants and impact on macro- economic performance (Working Paper, No. 13-72). Washington, DC: Internation- al Monetary Fund. Retrieved from https://www.imf.org/en/Publications/WP/Issues/ 2016/12/31/Non-Performing-Loans-in-CESEE-Determinants-and-Impact-on- Macroeconomic-Performance-40413
• Koju, L., Koju, R., & Wang, S. (2018). Does banking management affect credit risk? Evidence from the Indian banking system. International Journal of Financial Stud- ies, 6(3), 67. https://doi.org/10.3390/ijfs6030067
• 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), 462-481. https://doi.org/10.1108/AJEMS-07-2015-0088
• Louzis, D. P., Vouldis, A. T., & Metaxas, V. L. (2012). Macroeconomic and bank-specific determinants of non-performing loans in Greece: A comparative study of mortgage, business and consumer loan portfolios. Journal of Banking & Finance, 36(4), 1012-1027. https://doi.org/10.1016/j.jbankfin.2011.10.012
• Lutkepohl, H., & Xu, F. (2009). The role of log transformation in forecasting economic vari- ables (CESifo. Working Paper No. 2591). Munchen: Center for Economic Studies.
• Markowitz, H. (1952). Portfolio selection. Journal of Finance, 8, 77-91. https://doi.org/ 10.1111/j.1540-6261.1952.tb01525.x
• Messai, A. S., & Jouini, F. (2013). Micro and macro determinants of non-performing loans. International Journal of Economics and Financial Issues, 3(4), 852-860.
• Molyneux, P., & Yip, J. (2013). Income diversification and performance of Islamic banks. Journal of Financial Management, Markets and Institutions, 1(1), 47-66. https://doi.org/10.12831/73632
• Pop, I. D., Cepoi, C. O., & Anghel, D. G. (2018). Liquidity-threshold effect in non- -performing loans. Finance Research Letters, 27, 124-128. https://doi.org/10.1016/ j.frl.2018.02.012
• Radivojevic, N., & Jovovic, J. (2017). Examining of determinants of non-performing loans. Prague Economic Papers, 26(3), 300-316. https://doi.org/10.18267/j.pep.615
• Saba, I., Kouser, R., & Azeem, M. (2012, June). Determinants of non-performing loans: Case of US banking sector. The Romanian Economic Journal, 44(6), 125-136.
• Salas, V., & Saurina, J. (2002). Credit risk in two institutional regimes: Spanish commercial and savings banks. Journal of Financial Services Research, 22(3), 203224. https://doi.org/10.1023/A:1019781109676
• Satta, T. A. (2006). Performance evaluation of three small firms' financing schemes in Tanzania. Journal of Accounting and Organizational Change, 2(2), 164-180. https://doi.org/10.1108/18325910610675998
• Sector, F. (2002). Definitions of selected financial terms ratios and adjustments for micro- finance. Published by Inter-American Development Bank (IDB) September 25, 2019. https://publications.iadb.org/en/publication/11523/definitions-selected-financial-terms- ratios-and-adjustments-microfinance/
• Sheefeni, J. P. S. (2015). Evaluating the impact of bank specific determinants of non- -performing loans in Namibia. Journal of Emerging Issues in Economics, Finance and Banking, 4(2), 1525-1541.
• Skarica, B. (2014). Determinants of non-performing loans in Central and Eastern Euro- pean countries. Financial Theory and Practice, 38(1), 37-59.
• Stiroh, K. J. (2004). Diversification in banking: Is noninterest income the answer? Jour- nal of Money, Credit and Banking, 36(5), 853-882. https://doi.org/10.2139/ssrn. 334420/
• Sun, S. T., & Yannelis, C. (2016). Credit constraints and demand for higher education: Evidence from financial deregulation. Review of Economics and Statistics, 98(1), 12-24. https://doi.org/10.1162/REST_a_00558
• Toms, S., Wilson, N., & Wright, M. (2019, March). Innovation, intermediation, and the nature of entrepreneurship: A historical perspective. Strategic Entrepreneurship Journal, 14(1). https://doi.org/10.1002/sej.1310
• Valla, N., Saes-Escorbiac, B., & Tiesset, M. (2006, December). Bank liquidity and financial stability. Banque de France Financial Stability Review, 9(1), 89-104.
• Westley, G. D. (2002). Guidelines for monitoring and evaluating projects of the social entrepreneurship program. Washington: Inter-American Development Bank.
• 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, 48-60. https://doi.org/10.1016/jjbankfin.2015.11.010

Identyfikatory

DOI

doi.org/10.22367/jem.2020.42.01