Effect of bank diversification on the financial performance of listed banks in ghana

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There have been growing interests in bank diversification following the over two decades’ financial liberalization in Africa as well as the growing competition and increasing focus on risk management. There has been have a shift from net interest income to non-interest income not dependent on traditional financial intermediation. The decline in interest margins has changed the traditional role of banks and has forced them to search for new sources of revenue. However, there is still a number of insights that ought to be obtained on the effect of diversification on financial performance in banks. The study examines the relationship between bank diversification and financial performance of listed banks in Ghana. Specifically, income diversification, asset diversification and geographical diversification are examined. The study analyzes 8 listed banks in Ghana using their annual income statement between 2009 and 2021. For robustness, econometric techniques of ols; namely pooled ols, the fixed-effects model and random-effects are used. The study finds that there is a positive and insignificant relationship between income diversification (ind) and return on asset (roa). Also, the study illustrates that a positive and significant relationship between asset diversification (adv) and return on asset (roa) at 5% significant level. Lastly, the study finds a positive and significant relationship between geographical diversification (gdv) and bank return on asset (roa) at 1% significance level. Based on the findings, the study, therefore, concludes that except for iv income diversification, asset and geographic diversifications have positive and significant effect on the financial performance of listed banks in Ghana. The study hence recommends that, the banking sector supervisors and regulators in Ghana not only be aware of the role a particular bank plays in each line of business, but must understand the risk management strategy of the whole banking organization in order to evaluate the risk exposures of a particular bank giving the current levels of income diversification and its concomitant revenue volatility since income diversification shows a positive idea but it does not necessarily increase in financial performance. Government and economic policy makers are also urged to keep a stable macroeconomic environment including aiming high gdp but for low inflation, interest rates as a rise in these external variables have negative effect on the banks in Ghana.
A thesis submitted to the department of accounting and finance, school of business, college of humanities and social sciences, in partial fulfilment of the degree of master of science (accounting & finance option)