The Effect of Income Diversification on Bank Performance: In Case of Selected Commercial Banks in Ethiopia
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Date
2024-01-10
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
AAU
Abstract
This thesis investigates the relationship between income diversification and bank performance
based on financial performances of 17 commercial banks. Income diversification is the practice
of raising a bank's proportion of fee, net trading profits and other non-interest income within its
net operating income, in other words it is an expansion into new revenue-generating financial
services, with the exception of conventional intermediation activities. The study sampled the
financial performances of 17 commercial banks during the period of 2014 to 2021 and used
explanatory research design, quantitative research approach and secondary data sources that were
gained from National Bank of Ethiopia like annual reports, financial statements and company
information. The model that employed in this thesis was Random Effect model. The panel data
was presented by using inferential statistics. The proxy (dependent variable) is return on assets
(ROA) that measures performance of the banks and the independent variables are Herfindahl
Hirschman Index (HHI), Herfindahl Hirschman Index for non-interest income (HHINONII),
ratio of non-interest income to total asset (NONIITA), Share of Fees and Commission over Noninterest
income
(SHFC),
the
ratio
of
loan
to
total
asset(LOANTA)and
exchange
rate
(EXR).
The
econometric
results
have
shown
positive
and
significant
association
between
ratio
of
non-interest
income
to total asset (NONIITA) and bank performance (ROA) while Herfindahl Hirschman
Index for net operating income (HHI) indicated negative and significant impact on bank
performance this in part justifies policy actions to promote diversification. The coefficients of the
remaining variables have shown positive but insignificant association with bank performance
except HHINONII. From a policy point of view the finding suggests that bank regulations which
might tend to increase the level of income diversification (non-interest income) should be
evaluated carefully. Generally, the major findings reveal that income diversification has impact
on return on asset of the banks i.e. an increase in income diversification leads to an increase in
return on asset (ROA), which implies that banks are benefited from diversification of their
activities beyond the traditional lending activities. Finally, the study recommends that Ethiopian
commercial banks to diversify their income across non-interest income and to use it wisely by
considering the right areas of diversification.