Operational Diversification and Financial Performance of Sub- Saharan Africa Commercial Banks: Static and Dynamic Approach

• Main Authors: Odunayo Magret Olarewaju, Stephen Oseko Migiro, Mabutho Sibanda
• Format: Article
• Language: English
• Published: Danubius University 2017-10-01
• Series: Acta Universitatis Danubius: Oeconomica
• Subjects: Herfindahl Hirschman Index; Structure Conduct Performance; operational diversification; System-GMM; Sub-Saharan Africa
• Online Access: http://journals.univ-danubius.ro/index.php/oeconomica/article/view/4092/4210

Diversification is a key area in financial institution since their activities have gone beyond the traditional intermediary role. It is in this view that the study examines the effect of operational diversification on bank performance using the pooled, fixed, random and System GMM for the period 2006 to 2015 across 250 commercial banks from 30 countries in the region. Due to the robustness of SYS-GMM, the findings of this study reveal that using Herfindahl Hirschman index, all the dimensions of operational diversification; asset, liability, deposit and income including control variables such as bank size, liquidity, loan loss ratio, cost to income ratio and the lagged return on average asset (ROAA (L1)) are significant at 1% level with only deposit diversification (HHIde), liquidity (LOD) and cost to income ratio (CIR) which is a measure of banks’ efficiency having negative relationship with ROAA. Therefore, this study concludes that diversification of operational activities in SSA commercial banks have direct and significant effect on their financial performances. But, greater attention should be taken to monitor the diversification strategy so as to ensure that no dimension of banks’ activities is neglected.