Diversification and Bank Performance in a Developing Economy: Evidence from Bangladesh
Abstract
The paper investigates the impact of diversification on performance of banks in Bangladesh. Using panel data of 43 banks for the period 2010-2014, the paper makes panel estimates of impact of diversification of assets and sectoral loan diversification on profitability, cost and risk of banks. Both static and dynamic panel estimates are used in this study. The paper finds that diversification has a very minimum impact on profitability. Although loan diversification increases net interest income, both asset diversification and loan diversification have negative relation with operating cost, implying existence of diseconomies of scope as diversification raises cost inefficiency. While, diversification of asset virtually has no significant impact on risk, loan diversification seems to reduce risk.
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