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Article
Publication date: 20 July 2021

King Carl Tornam Duho, Divine Mensah Duho and Joseph Ato Forson

This study explores the effect of income diversification strategy on credit risk and market risk of microfinance institutions (MFIs) in Ghana as an emerging market.

Abstract

Purpose

This study explores the effect of income diversification strategy on credit risk and market risk of microfinance institutions (MFIs) in Ghana as an emerging market.

Design/methodology/approach

The study is based on quarterly data of averagely 271 MFIs that have operated from 2016 to 2018. The dataset is unbalanced and pooled cross-sectional with 3,259 data points. The study measures the diversification strategy using income diversification indices, and accounting ratios to measure the other variables. We utilised the weighted least squares (WLS) approach to explore the nexus.

Findings

The findings show that income diversification is associated with better loan quality and credit risk management. Market risk increases with the level of income diversification of microfinance firms. It is evident that large MFIs can manage their credit risks well and can have a low default rate, depicting an overall U-shaped nexus. On the other hand, the effect of size on market risk is an inverted U-shaped. The effect of asset tangibility on credit risk is positively significant while the effect on market risk is negatively significant. High profitability enhances credit risk management leading to lower loan losses while in the case of diversified and profitable MFIs, they tend to invest more in government securities. The results suggest that MFIs that hold more cash and cash equivalents tend to have high loan loss provision and more government securities suggesting much attention should be paid to optimal cash management.

Practical implications

The results throw light on the credit risk and market risk profile of the firms and the effect of diversification strategies on them. The findings are relevant for effective macroprudential regulation, market regulation and prudential regulation of the microfinance sector.

Social implications

The findings reveal the nature of income diversification strategy of MFIs in emerging markets such as Ghana, pointing out how they affect the risk exposure of MFIs that lend to the pro-poor population.

Originality/value

This is a premier formal assessment of the nexus between income diversification strategies and risk management among MFIs that serve the pro-poor population in the emerging market context.

Details

Journal of Economic and Administrative Sciences, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1026-4116

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Article
Publication date: 16 June 2021

Bismark Amfo, James Osei Mensah, Ernest Baba Ali, Gilbert Dagunga, Seth Etuah and Robert Aidoo

This study investigates implications of crop and income diversifications on consumption expenditure (welfare) of rice-producing households in Ghana. It further compares…

Abstract

Purpose

This study investigates implications of crop and income diversifications on consumption expenditure (welfare) of rice-producing households in Ghana. It further compares diversification by three rice production systems: two-season rain-fed, two-season irrigated and one-season rain-fed rice production.

Design/methodology/approach

Primary data were sourced from 225 rice farmers. Margalef index and three-stage least-squares were employed.

Findings

Majority of rice-farming households in Ghana diversify livelihoods. The extent of livelihood diversification differs among two-season rain-fed, two-season irrigated and one-season rain-fed rice-producing households. Credit, distance to district capitals, production purpose and number of farming seasons influence crop and income diversifications, and consumption expenditure of rice-producing households. While crop diversification reduces consumption expenditure, income diversification increases it. Crop and income diversifications positively influence each other. Consumption expenditure reduces crop diversification but increases income diversification.

Practical implications

Policy should be directed towards the promotion of more livelihood activities to boost rice farmers' welfare. There should be awareness creation and training programmes to enable rice farmers realize different economic activities within and outside the agricultural value chain.

Originality/value

Crop and income diversifications were measured as continuous response variables, unlike previous studies that used a binary response variable. The authors established a synergy among crop and income diversifications, and consumption expenditure (welfare). The authors further compared crop and income diversifications by three rice production systems: two-season rain-fed, two-season irrigated and one-season rain-fed rice production systems.

Open Access
Article
Publication date: 26 November 2020

Peter Nderitu Githaiga

The purpose of this paper is to examine whether income diversification moderates the relationship between human capital and bank performance.

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Abstract

Purpose

The purpose of this paper is to examine whether income diversification moderates the relationship between human capital and bank performance.

Design/methodology/approach

The study uses a sample of 53 banks and panel data for the years 2010–2018. The hypotheses are tested through hierarchical multiple regression and the choice between fixed effect and random effect estimation is based on the results of the Hausman test.

Findings

The study finds that human capital and income diversification significantly influence bank performance; however, the direction of the causality varies. While human capital has a positive effect, income diversification has a negative effect. Additionally, the interaction term has a negative and significant effect on bank performance, inferring that income diversification has an antagonistic effect on the human capital and bank performance relationship. For the control variable, liquidity and asset quality negatively affects bank performance while capitalization has a positive effect.

Research limitations/implications

Human capital was measured as human capital efficiency (HCE), which is a quantitative measure of human capital, hence future studies can use qualitative measures. Also, the study focused on commercial banks in East Africa, future researcher may possibly consider other regions and industries, which would shed more insights.

Practical implications

The results of this paper provide valuable insights. Bank managers can get a better understanding of the impact of human capital on bank performance, and the need to invest more in human capital development. Further, the study cautions bank managers that engaging in non-lending activities might destroy the economic value of human capital and ultimately lower performance. The study also recommends that policymakers should address the obstacles to banks' income diversification, for instance relaxing regulations restricting diversification; this might enable banks to leverage related financial service activities for optimal utilization of human capital and improve banks' profitability.

Originality/value

While a good number of previous studies investigated the direct effect of human capital and income diversification on the performance of banks, this study examines the moderating role of income diversification on the relationship between human capital and performance of banks in East Africa.

Details

Asian Journal of Accounting Research, vol. 6 no. 1
Type: Research Article
ISSN: 2443-4175

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Article
Publication date: 10 January 2019

Syed Moudud-Ul-Huq

This paper aims to empirically investigate the impact of bank diversification on performance and risk-taking behavior. The analysis uses an unbalanced panel data set…

Abstract

Purpose

This paper aims to empirically investigate the impact of bank diversification on performance and risk-taking behavior. The analysis uses an unbalanced panel data set covering the period between 2007 and 2015 for a total of 1,397 banks from ASEAN-5 and BRICS economies.

Design/methodology/approach

Dynamic panel generalized method of moments (GMM) has been used primarily to examine the relationship between bank diversification on performance and risk-taking and later, validate the core results by incorporating two-stage least squares (2SLS).

Findings

Similar to the results of previous studies based on the developed economy, this study also confirms the hypothesis of the portfolio diversification. The key robust result is that the benefits from revenue and assets diversification are heterogeneous and the BRICS banks achieve higher benefit from using both diversification strategies. On the other hand, ASEAN-5 banks fail to show the significant advantage from assets diversification. Among the diverse sources of income, interest is not a major determinant of efficiency and bank’s stability, while ASEAN-5 banks should foster commission and others income as mechanisms for diversification benefit in the region.

Originality/value

A few studies are available in the current literature which examines the impact of revenue and assets diversification on either bank performance or risk-taking in the developed economy’s context. However, very few studies are found that examine the relationship between bank diversification, performance and risk-taking together. Moreover, to the best of the author’s knowledge, there is a dearth of literature on this topic that built on the comparative analysis between two regions, i.e. ASEAN-5 and BRICS. As a result, the empirical results of this research provide useful information to the stakeholders so that they can enhance bank diversification strategy and implement them successfully by considering the other factors.

Details

Journal of Financial Regulation and Compliance, vol. 27 no. 1
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 9 January 2019

Ritab AlKhouri and Houda Arouri

The purpose of this paper is to investigate the effect of revenue diversification, non-interest income and asset diversification on the performance and stability of the…

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Abstract

Purpose

The purpose of this paper is to investigate the effect of revenue diversification, non-interest income and asset diversification on the performance and stability of the Gulf Cooperation Council (GCC) conventional and Islamic banking systems.

Design/methodology/approach

The authors implement a panel of 69 conventional and Islamic banks listed in six GCC markets over the period of 2003–2015, using the System Generalized Method of Moments methodology.

Findings

Non-interest income diversification has a negative impact on GCC banks’ performance, while asset-based diversification affects banks performance positively. However, Investors tend to penalize the value of the banks’ assets, which are highly diversified. Government intervention, lack of competition, legal protection and high control of Central banks on GCC banks’ have positive impact on performance. Contrary to the results on conventional banks, asset diversification adds value to Islamic banks. Overall, both banks’ revenue and non-interest diversification have negative impact on GCC banks’ stability, while asset diversification improves Islamic banks’ stability.

Research limitations/implications

The analysis is limited to a sample of banks, which are listed in the GCC stock exchanges. The lack of data on private and foreign banks operating in the region made the analysis and, consequently, the results specific to shareholding companies. Also, the authors’ measures of bank stability might not be appropriate to use for Islamic banks, given their banking models implemented.

Practical implications

Research results provide important implications for regulators, bank managers and policy makers, as to the expected ways to support economic diversification through bank diversification strategies.

Originality/value

Unlike related studies, the authors’ sample of homogeneous banks has a market structure that is different from the samples in the literature covering either developed countries or heterogeneous samples from both developed and developing countries. Furthermore, using an efficient econometric methodology, the authors deal with two types of banks: conventional banks and Islamic banks. The research determines which type of bank is more able to benefit from different types of diversification. Unlike previous research, this research explores the sensitivity of the results both to the regulatory environment of the GCC market and to general market conditions.

Details

International Journal of Managerial Finance, vol. 15 no. 1
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 17 April 2020

Phong Hoang Nguyen and Duyen Thi Bich Pham

The study examines the impact of income diversification on cost efficiency of Vietnamese commercial banks over the period 2005–2017.

Abstract

Purpose

The study examines the impact of income diversification on cost efficiency of Vietnamese commercial banks over the period 2005–2017.

Design/methodology/approach

Income diversification indicators are designed based on measures of diversifying loan portfolio. Besides the traditional model, we use the Fractional Regression to estimate the model with dependent variables defined on the unit interval.

Findings

Through the two-stage DEA analysis, we find that the income diversification has a positive impact on the cost efficiency of banks. In addition, this impact is stronger for unlisted banks and in the phase of banking system ongoing restructuring.

Originality/value

The use of a variety of income diversification measures and estimation methods for models with bounded dependent variable has provided a reliable empirical evidence of the advantages of implementing a strategy on structural diversity of both interest and non-interest income in the emerging banking markets such as Vietnam.

Details

International Journal of Managerial Finance, vol. 16 no. 5
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 4 May 2020

Hoang Van Cuong, Hiep Ngoc Luu, Loan Quynh Thi Nguyen and Vu Tuan Chu

The purposes of this paper are twofold. First, it analyses the income structure in cooperative financial institutions and examines how traditional and non-traditional…

Abstract

Purpose

The purposes of this paper are twofold. First, it analyses the income structure in cooperative financial institutions and examines how traditional and non-traditional incomes are related. Second, it evaluates whether increasing diversification towards non-traditional incomes facilitates or hampers the benefits of financial cooperative owners.

Design/methodology/approach

Data are collected from over 3,100 US credit unions over the period of 1994–2016. A number of modern econometric techniques are employed throughout the analysis, including the use of panel fixed effect, generalised method of moments (GMM) and two-stage least square (2SLS) methodologies.

Findings

Using US credit unions as the empirical setting, the empirical results reveal that the expansion of traditional income leads to a corresponding increase in income from non-traditional activities. However, an increasing reliance on non-traditional income causes a significant drop in interest margins. The authors also find that the extent to which income diversification affects owner benefit varies across credit union types and period of time. While income diversification negatively affects owners' benefits in single common bond credit unions, it has no significant influence on multiple common bond and community credit union owners' benefits. Third, diversification can be beneficial during crisis time, but can be detrimental to owner benefit during normal time.

Originality/value

This paper provides some of the first empirical investigations on the diversification strategy of cooperative financial institutions. Therefore, the results offer significant policy implications for policymakers and market participants on whether financial cooperatives should diversify or specialise.

Details

International Journal of Managerial Finance, vol. 16 no. 4
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 15 September 2020

Junpeng Li, Wanglin Ma, Alan Renwick and Hongyun Zheng

The objective of this study is to estimate the impacts of access to irrigation on farm income, household income and income diversification.

Abstract

Purpose

The objective of this study is to estimate the impacts of access to irrigation on farm income, household income and income diversification.

Design/methodology/approach

This study employs an endogenous switching regression (ESR) model to address the selection bias arising from both observed and unobserved factors and analyze cross-sectional data collected from Fujian, Henan and Sichuan provinces in China. The authors use the Simpson index to measure household income diversification. The propensity score matching (PSM) model and control function approach are also used for comparison purpose.

Findings

After controlling for the selection bias, the authors find that access to irrigation has a positive and statistically significant impact on rural incomes and diversification. The treatment effects of access to irrigation are to increase farm income, household income and income diversification by around 14, 10 and 107%, respectively. The positive effects of access to irrigation are confirmed by the estimates of the PSM model and control function approach. Further analysis reveals that the irrigation effects on rural incomes and diversification are heterogeneous between small-scale and large-scale farmers and between male-headed and female-headed households.

Practical implications

The authors’ findings suggest that the government should continue to improve irrigation infrastructure construction in rural China to promote smallholder farmers' water access and at the same time facilitate farmers' access to better agronomic and irrigation information. There exist gender and farm size related income and diversification effects of access to irrigation, and the irrigation access is associated with farm location. Thus, when developing regional irrigation programs consideration needs to be taken of whether the rural farming systems are dominated by male/female household heads and land fragmentation/consolidation issues.

Originality/value

Although a large body of literature has investigated the effects of irrigation development in rural areas, little is known about the impact of access to irrigation on income diversification. The selection bias associated with unobserved heterogeneities is usually neglected in previous studies. This study provides the first attempt by examining the impacts of access to irrigation on rural incomes and diversification, using the ESR model to address both observed and unobserved selection bias.

Details

China Agricultural Economic Review, vol. 12 no. 4
Type: Research Article
ISSN: 1756-137X

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Article
Publication date: 4 September 2020

Iqbal Irfany, Peter John McMahon, Jenny-Ann Toribio, Kim-Yen Phan-Thien, Muhamad Amin Rifai, Sigit Yusdiyanto, Grant Vinning, David I. Guest, Merrilyn Walton and Nunung Nuryartono

The aim of this study was to evaluate determinants of four diversification practises by cocoa smallholders in West Sulawesi, Indonesia: (1) growing other crops, (2…

Abstract

Purpose

The aim of this study was to evaluate determinants of four diversification practises by cocoa smallholders in West Sulawesi, Indonesia: (1) growing other crops, (2) keeping livestock, (3) off-farm work for wages (4) off-farm self-employment, and the impact of diversification on welfare of community members.

Design/methodology/approach

Household interviews (n = 116) conducted in two subdistricts (Anreapi and Mapilli) of Polewali-Mandar District, West Sulawesi, provided quantitative data on household characteristics, crop and livestock production, income sources, expenditure and credit access. Two villages per subdistrict were included in the study, each producing cocoa as the main crop but differing in their proximity to a market town. Logistic regression was applied to identify determinants of diversification by households. Multiple linear regression (MLR) models evaluated the impact of diversification practices and other explanatory variables on two proxies of welfare (or household wealth): per capita value of durable assets (household assets other than land or livestock) and per capita expenditure for each household.

Findings

Mean per capita cocoa production in the sample was low (51 kg dry beans/annum). The mean dependency ratio (proportion of household occupants age <18 and >64) was 35%, with an average of five occupants per household. Household heads were predominantly male (95%), averaging 46 yo and 7 years of formal education. Most households (72%) depended on loans, but only 24% accessed formal loans. Significant determinants of diversification practices were access to formal credit for self-employment and subdistrict for livestock, with Mapilli subdistrict households more likely to keep livestock. Household predictors in the MLR accounted for 28% variation of the dependent, per capita value of durable goods. Off-farm self-employment and raising livestock significantly improved welfare, but growing other crops or off-farm work for wages had little effect. Other household variables demonstrated to have significant positive effects on welfare were education of the household head, proximity to a market town and land area per household.

Research limitations/implications

The study was restricted to a relatively small sample size (n = 116). Studies including panel data or larger numbers of households could enable the identification of further determinants of diversification.

Practical implications

The study demonstrates that diversification has the potential to improve rural livelihoods, but that obstacles, especially formal credit access, may deter poorer households from diversifying their income sources.

Social implications

Programs and policies that facilitate access to formal finance by smallholders could encourage diversification into small business and improve livelihoods in cocoa-dependent communities.

Originality/value

In the light of the decline in cocoa farm productivity in West Sulawesi, the study demonstrates the potential benefits, as well as limitations, of income diversification by smallholders.

Details

International Journal of Social Economics, vol. 47 no. 10
Type: Research Article
ISSN: 0306-8293

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Article
Publication date: 25 November 2019

Harishankar Vidyarthi

The purpose of this paper is to examine the dynamics between income diversification and performance (cost, profit, revenue, technical, pure technical and scale efficiency…

Abstract

Purpose

The purpose of this paper is to examine the dynamics between income diversification and performance (cost, profit, revenue, technical, pure technical and scale efficiency) for 38 listed Indian banks within panel data framework during the period 2004-2005 to 2015-16.

Design/methodology/approach

This study computes bank’s cost, profit, revenue, technical, pure technical and scale efficiency within intermediation approach with data envelopment analysis (DEA) as a performance indicator, followed by exploring the association between income diversification and bank performance using truncated Tobit regression within panel data framework.

Findings

Tobit regression results revealed inverted U-shaped relationship between the income diversification and estimated efficiency parameters for the overall panel. Size and bank intermediation ratio seems to be a major factor in exploiting the potential benefits of income diversification. The author reconfirmed the inverted U-shaped relationship with these efficiency parameters for exclusive subsamples consisting of government-owned and private sector banks.

Research limitations/implications

Inverted U-shaped relationship between the income diversification and estimated efficiency parameters suggest that banks should go for limited diversification to improve performance. Thus, regulators and banks should pursue limited diversification strategy for improving banking efficiency.

Originality/value

This study computes bank performance (cost, profit, revenue, technical, pure technical and scale efficiency) based on DEA followed by exploring the association between performance and income diversification for 38 Bombay stock exchange listed banks.

Details

Journal of Financial Economic Policy, vol. 12 no. 3
Type: Research Article
ISSN: 1757-6385

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