Bank maturity, income diversification, and bank stability
Abstract
The purpose of this research is to examine the influence of bank life cycle or bank maturity on income diversification (ID) and stability. In addition, this research investigates the ID relationship with bank stability. Drawing on the dynamic resource-based view and modern portfolio theory, this research examines the influence of a paramount internal factor i.e. bank life cycle or bank maturity on income diversification (ID) and stability consequence. Data were collected from the Pakistani’s commercial banks’ financial statements over the period 2005 to 2019. This research relied on the fixed effect and generalized method of moments (GMM) model to empirically test the proposed relationships. Core findings of the research reveal that bank maturity leads to enhanced ID and ID strongly influences the bank stability consequence, moreover, research findings are robust to use different measures of bank stability and GMM estimation techniques. To the authors’ best knowledge, this research is the first to report specific evidence about bank maturity as an internal driver of income diversification and stability and advances the literature seeking to understand the determinants of ID. This research also shows managers to recognize the importance of internal drivers to diversify effectively into non-interest income, and how such an effective ID translates into stability consequence.
Keyword : bank life cycle, income diversification, bank stability, banking sector, GMM, Pakistan
How to Cite
Tariq, W., Usman, M., Tariq, A., Rashid, R., Yin, J., Memon, M. A., & Ashfaq, M. (2021). Bank maturity, income diversification, and bank stability. Journal of Business Economics and Management, 22(6), 1492-1511. https://doi.org/10.3846/jbem.2021.15583
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Anginer, D., Demirgüç-Kunt, A., & Mare, D. S. (2018). Bank capital, institutional environment and systemic stability. Journal of Financial Stability, 37, 97–106. https://doi.org/10.1016/j.jfs.2018.06.001
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Baum, C. (2001). XTTEST3: Stata module to compute Modified Wald statistic for groupwise het-eroskedasticity.
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of econometrics, 87(1), 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
Carbo Valverde, S., & Rodriguez Fernandez, F. (2007). The determinants of bank margins in European banking. Journal of Banking & Finance, 31(7), 2043–2063. https://doi.org/10.1016/j.jbankfin.2006.06.017
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. https://doi.org/10.1007/s10693-008-0029-4
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Gavurova, B., Belas, J., Kocisova, K., & Kliestik, T. (2017). Comparison of selected methods for performance evaluation of Czech and Slovak commercial banks. Journal of Business Economics and Management, 18(5), 852–876. https://doi.org/10.3846/16111699.2017.1371637
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Habib, A., & Hasan, M. M. (2017). Firm life cycle, corporate risk‐taking and investor sentiment. Accounting & Finance, 57(2), 465–497. https://doi.org/10.1111/acfi.12141
Haque, A., & Tariq, A. (2012). Efficiency of banks in Pakistan: A non parametric approach. Business and Economic Research, 2(1). https://doi.org/10.5296/ber.v2i1.1711
Hasan, M. M., & Habib, A. (2017). Corporate life cycle, organizational financial resources and corporate social responsibility. Journal of Contemporary Accounting & Economics, 13(1), 20–36. https://doi.org/10.1016/j.jcae.2017.01.002
Heffernan, S. A., & Fu, X. (2010). Determinants of financial performance in Chinese banking. Applied Financial Economics, 20(20), 1585–1600. https://doi.org/10.1080/09603107.2010.505553
Imran, K., & Nishat, M. (2013). Determinants of bank credit in Pakistan: A supply side approach. Economic Modelling, 35, 384–390. https://doi.org/10.1016/j.econmod.2013.07.022
Khalid, A., & Nadeem, T. (2017). Bank credit to private sector: A critical review in the context of financial sector reforms (pp. 1–25). State Bank of Pakistan.
Kim, H., Batten, J. A., & Ryu, D. (2020). Financial crisis, bank diversification, and financial stability: OECD countries. International Review of Economics & Finance, 65, 94–104. https://doi.org/10.1016/j.iref.2019.08.009
Li, X., Feng, H., Zhao, S., & Carter, D. A. (2021). The effect of revenue diversification on bank profitability and risk during the COVID-19 pandemic. Finance Research Letters, 101957. https://doi.org/10.1016/j.frl.2021.101957
Lin, Y., Shi, X., & Zheng, Z. (2021). Diversification strategy and bank market power: Does foreign ownership matter? Applied Economics Letters, 28(4), 269–273. https://doi.org/10.1080/13504851.2020.1751798
Mercieca, S., Schaeck, K., & Wolfe, S. (2007). Small European banks: Benefits from diversification? Journal of Banking & Finance, 31(7), 1975–1998. https://doi.org/10.1016/j.jbankfin.2007.01.004
Nisar, S., Peng, K., Wang, S., & Ashraf, B. (2018). The impact of revenue diversification on bank profitability and stability: Empirical evidence from South Asian countries. International Journal of Financial Studies, 6(2), 40. https://doi.org/10.3390/ijfs6020040
Owen, S., & Yawson, A. (2010). Corporate life cycle and M&A activity. Journal of Banking & Finance, 34(2), 427–440. https://doi.org/10.1016/j.jbankfin.2009.08.003
Pennathur, A. K., Subrahmanyam, V., & Vishwasrao, S. (2012). Income diversification and risk: Does ownership matter? An empirical examination of Indian banks. Journal of Banking & Finance, 36(8), 2203–2215. https://doi.org/10.1016/j.jbankfin.2012.03.021
Penrose, E. T. (1959). The theory of the growth ofthe firm. Sharpe.
Perera, S., Skully, M., & Wickramanayake, J. (2007). Cost efficiency in South Asian banking: The impact of bank size, state ownership and stock exchange listings. International Review of Finance, 7(1–2), 35–60. https://doi.org/10.1111/j.1468-2443.2007.00067.x
Sanya, S., & Wolfe, S. (2011). Can banks in emerging economies benefit from revenue diversification? Journal of Financial Services Research, 40(1–2), 79–101. https://doi.org/10.1007/s10693-010-0098-z
Sharma, S., & Anand, A. (2018). Income diversification and bank performance: evidence from BRICS nations. International Journal of Productivity and Performance Management, 67(9), 1625–1639. https://doi.org/10.1108/IJPPM-01-2018-0013
Stiroh, K. J. (2004a). Diversification in banking: Is noninterest income the answer? Journal of Money, Credit and Banking, 36(5), 853–882. https://doi.org/10.1353/mcb.2004.0076
Stiroh, K. J. (2004b). Do community banks benefit from diversification? Journal of Financial Services Research, 25(2–3), 135–160. https://doi.org/10.1023/B:FINA.0000020657.59334.76
Tariq, A., Badir, Y., & Chonglerttham, S. (2019a). Green innovation and performance: moderation analyses from Thailand. European Journal of Innovation Management, 22(3), 446–467. https://doi.org/10.1108/EJIM-07-2018-0148
Tariq, A., Badir, Y. F., Safdar, U., Tariq, W., & Badar, K. (2019b). Linking firms’ life cycle, capabilities, and green innovation. Journal of Manufacturing Technology Management, 31(2), 284–304. https://doi.org/10.1108/JMTM-08-2018-0257
Tariq, W., Ali, I., Ibrahim, M., Asim, M., & Rehman, N. U. (2014a). Theory and empirical evidence on corporate governance from Banking sector of Pakistan. Business and Economic Research, 4(1), 163–174. https://doi.org/10.5296/ber.v4i1.5180
Tariq, W., Usman, M., Mir, H. Z., Aman, I., & Ali, I. (2014b). Determinants of commercial banks profitability: Empirical evidence from Pakistan. International Journal of Accounting and Financial Reporting, 4(2), 1–22. https://doi.org/10.5296/ijafr.v4i2.5939
Williams, B. (2016). The impact of non-interest income on bank risk in Australia. Journal of Banking & Finance, 73, 16–37. https://doi.org/10.1016/j.jbankfin.2016.07.019
Zouaoui, H., & Zoghlami, F. (2020). On the income diversification and bank market power nexus in the MENA countries: Evidence from a GMM panel-VAR approach. Research in International Business and Finance, 52, 101186. https://doi.org/10.1016/j.ribaf.2020.101186
Abuzayed, B., Al-Fayoumi, N., & Molyneux, P. (2018). Diversification and bank stability in the GCC. Journal of International Financial Markets, Institutions and Money, 57, 17–43. https://doi.org/10.1016/j.intfin.2018.04.005
Acharya, V. V., Hasan, I., & Saunders, A. (2006). Should banks be diversified? Evidence from individual bank loan portfolios. The Journal of Business, 79(3), 1355–1412. https://doi.org/10.1086/500679
Adesina, K. S. (2021). How diversification affects bank performance: The role of human capital. Economic Modelling, 94, 303–319. https://doi.org/10.1016/j.econmod.2020.10.016
Ahamed, M. M. (2017). Asset quality, non-interest income, and bank profitability: Evidence from Indian banks. Economic Modelling, 63, 1–14. https://doi.org/10.1016/j.econmod.2017.01.016
Al‐Hadi, A., Hasan, M. M., & Habib, A. (2016). Risk committee, firm life cycle, and market risk disclosures. Corporate Governance: An International Review, 24(2), 145–170. https://doi.org/10.1111/corg.12115
Amidu, M., & Wolfe, S. (2013). Does bank competition and diversification lead to greater stability? Evidence from emerging markets. Review of Development Finance, 3(3), 152–166. https://doi.org/10.1016/j.rdf.2013.08.002
Anginer, D., Demirgüç-Kunt, A., & Mare, D. S. (2018). Bank capital, institutional environment and systemic stability. Journal of Financial Stability, 37, 97–106. https://doi.org/10.1016/j.jfs.2018.06.001
Anton, S. G. (2019). Leverage and firm growth: an empirical investigation of gazelles from emerging Europe. International Entrepreneurship and Management Journal, 15(1), 209–232. https://doi.org/10.1007/s11365-018-0524-5
Baele, L., De Jonghe, O., & Vander Vennet, R. (2007). Does the stock market value bank diversification? Journal of Banking & Finance, 31(7), 1999–2023. https://doi.org/10.1016/j.jbankfin.2006.08.003
Baum, C. (2001). XTTEST3: Stata module to compute Modified Wald statistic for groupwise het-eroskedasticity.
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of econometrics, 87(1), 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
Carbo Valverde, S., & Rodriguez Fernandez, F. (2007). The determinants of bank margins in European banking. Journal of Banking & Finance, 31(7), 2043–2063. https://doi.org/10.1016/j.jbankfin.2006.06.017
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. https://doi.org/10.1007/s10693-008-0029-4
DeAngelo, H., DeAngelo, L., & Stulz, R. M. (2006). Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory. Journal of Financial Economics, 81(2), 227–254. https://doi.org/10.1016/j.jfineco.2005.07.005
Dietrich, A., & Wanzenried, G. (2011). Determinants of bank profitability before and during the crisis: Evidence from Switzerland. Journal of International Financial Markets, Institutions and Money, 21(3), 307–327. https://doi.org/10.1016/j.intfin.2010.11.002
Doan, A.-T., Lin, K.-L., & Doong, S.-C. (2018). What drives bank efficiency? The interaction of bank income diversification and ownership. International Review of Economics & Finance, 55, 203–219. https://doi.org/10.1016/j.iref.2017.07.019
Duprey, T. (2012). Bank Ownership and Credit Cycle: the lower sensitivity of public bank lending to the business cycle. World Bank Group. https://doi.org/10.2139/ssrn.2185859
Gavurova, B., Belas, J., Kocisova, K., & Kliestik, T. (2017). Comparison of selected methods for performance evaluation of Czech and Slovak commercial banks. Journal of Business Economics and Management, 18(5), 852–876. https://doi.org/10.3846/16111699.2017.1371637
Goddard, J., McKillop, D., & Wilson, J. O. (2008). The diversification and financial performance of US credit unions. Journal of Banking & Finance, 32(9), 1836–1849. https://doi.org/10.1016/j.jbankfin.2007.12.015
Habib, A., & Hasan, M. M. (2017). Firm life cycle, corporate risk‐taking and investor sentiment. Accounting & Finance, 57(2), 465–497. https://doi.org/10.1111/acfi.12141
Haque, A., & Tariq, A. (2012). Efficiency of banks in Pakistan: A non parametric approach. Business and Economic Research, 2(1). https://doi.org/10.5296/ber.v2i1.1711
Hasan, M. M., & Habib, A. (2017). Corporate life cycle, organizational financial resources and corporate social responsibility. Journal of Contemporary Accounting & Economics, 13(1), 20–36. https://doi.org/10.1016/j.jcae.2017.01.002
Heffernan, S. A., & Fu, X. (2010). Determinants of financial performance in Chinese banking. Applied Financial Economics, 20(20), 1585–1600. https://doi.org/10.1080/09603107.2010.505553
Imran, K., & Nishat, M. (2013). Determinants of bank credit in Pakistan: A supply side approach. Economic Modelling, 35, 384–390. https://doi.org/10.1016/j.econmod.2013.07.022
Khalid, A., & Nadeem, T. (2017). Bank credit to private sector: A critical review in the context of financial sector reforms (pp. 1–25). State Bank of Pakistan.
Kim, H., Batten, J. A., & Ryu, D. (2020). Financial crisis, bank diversification, and financial stability: OECD countries. International Review of Economics & Finance, 65, 94–104. https://doi.org/10.1016/j.iref.2019.08.009
Li, X., Feng, H., Zhao, S., & Carter, D. A. (2021). The effect of revenue diversification on bank profitability and risk during the COVID-19 pandemic. Finance Research Letters, 101957. https://doi.org/10.1016/j.frl.2021.101957
Lin, Y., Shi, X., & Zheng, Z. (2021). Diversification strategy and bank market power: Does foreign ownership matter? Applied Economics Letters, 28(4), 269–273. https://doi.org/10.1080/13504851.2020.1751798
Mercieca, S., Schaeck, K., & Wolfe, S. (2007). Small European banks: Benefits from diversification? Journal of Banking & Finance, 31(7), 1975–1998. https://doi.org/10.1016/j.jbankfin.2007.01.004
Nisar, S., Peng, K., Wang, S., & Ashraf, B. (2018). The impact of revenue diversification on bank profitability and stability: Empirical evidence from South Asian countries. International Journal of Financial Studies, 6(2), 40. https://doi.org/10.3390/ijfs6020040
Owen, S., & Yawson, A. (2010). Corporate life cycle and M&A activity. Journal of Banking & Finance, 34(2), 427–440. https://doi.org/10.1016/j.jbankfin.2009.08.003
Pennathur, A. K., Subrahmanyam, V., & Vishwasrao, S. (2012). Income diversification and risk: Does ownership matter? An empirical examination of Indian banks. Journal of Banking & Finance, 36(8), 2203–2215. https://doi.org/10.1016/j.jbankfin.2012.03.021
Penrose, E. T. (1959). The theory of the growth ofthe firm. Sharpe.
Perera, S., Skully, M., & Wickramanayake, J. (2007). Cost efficiency in South Asian banking: The impact of bank size, state ownership and stock exchange listings. International Review of Finance, 7(1–2), 35–60. https://doi.org/10.1111/j.1468-2443.2007.00067.x
Sanya, S., & Wolfe, S. (2011). Can banks in emerging economies benefit from revenue diversification? Journal of Financial Services Research, 40(1–2), 79–101. https://doi.org/10.1007/s10693-010-0098-z
Sharma, S., & Anand, A. (2018). Income diversification and bank performance: evidence from BRICS nations. International Journal of Productivity and Performance Management, 67(9), 1625–1639. https://doi.org/10.1108/IJPPM-01-2018-0013
Stiroh, K. J. (2004a). Diversification in banking: Is noninterest income the answer? Journal of Money, Credit and Banking, 36(5), 853–882. https://doi.org/10.1353/mcb.2004.0076
Stiroh, K. J. (2004b). Do community banks benefit from diversification? Journal of Financial Services Research, 25(2–3), 135–160. https://doi.org/10.1023/B:FINA.0000020657.59334.76
Tariq, A., Badir, Y., & Chonglerttham, S. (2019a). Green innovation and performance: moderation analyses from Thailand. European Journal of Innovation Management, 22(3), 446–467. https://doi.org/10.1108/EJIM-07-2018-0148
Tariq, A., Badir, Y. F., Safdar, U., Tariq, W., & Badar, K. (2019b). Linking firms’ life cycle, capabilities, and green innovation. Journal of Manufacturing Technology Management, 31(2), 284–304. https://doi.org/10.1108/JMTM-08-2018-0257
Tariq, W., Ali, I., Ibrahim, M., Asim, M., & Rehman, N. U. (2014a). Theory and empirical evidence on corporate governance from Banking sector of Pakistan. Business and Economic Research, 4(1), 163–174. https://doi.org/10.5296/ber.v4i1.5180
Tariq, W., Usman, M., Mir, H. Z., Aman, I., & Ali, I. (2014b). Determinants of commercial banks profitability: Empirical evidence from Pakistan. International Journal of Accounting and Financial Reporting, 4(2), 1–22. https://doi.org/10.5296/ijafr.v4i2.5939
Williams, B. (2016). The impact of non-interest income on bank risk in Australia. Journal of Banking & Finance, 73, 16–37. https://doi.org/10.1016/j.jbankfin.2016.07.019
Zouaoui, H., & Zoghlami, F. (2020). On the income diversification and bank market power nexus in the MENA countries: Evidence from a GMM panel-VAR approach. Research in International Business and Finance, 52, 101186. https://doi.org/10.1016/j.ribaf.2020.101186