<abstract xmlns="http://www.w3.org/1999/xhtml">

<bold>Aim/purpose</bold> – 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.
<bold>Design/methodology/approach</bold> – 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.
<bold>Findings</bold> – 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.
<bold>Research implications/limitations</bold> – 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.
<bold>Originality/value/contribution</bold> – 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.
</abstract>

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.

Revenue diversification and quality of loan portfolio

Journal of Economics and Management

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

{"article-title":"Revenue diversification and quality of loan portfolio"}

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...

Revenue diversification and quality of loan portfolio

Published Online: Jul 23, 2021

Page range: 5 - 19

Received: Sep 22, 2019

Accepted: Nov 12, 2020

DOI: https://doi.org/10.22367/jem.2020.42.01

Keywords
Quality of loan portfolio, revenue diversification, nonperforming loan, banking sector, Hirschman–Herfindahl index

© 2020 Peter Nderitu Githaiga, published by Sciendo

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

Revenue diversification and quality of loan portfolio

Published Online: Jul 23, 2021

Page range: 5 - 19

Received: Sep 22, 2019

Accepted: Nov 12, 2020

DOI: https://doi.org/10.22367/jem.2020.42.01

KeywordsQuality of loan portfolio, revenue diversification, nonperforming loan, banking sector, Hirschman–Herfindahl index

© 2020 Peter Nderitu Githaiga, published by Sciendo

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

Keywords
Quality of loan portfolio, revenue diversification, nonperforming loan, banking sector, Hirschman–Herfindahl index