The Effects of Revenue Diversification and Cross Border Banking on Risk and Return

Abstract

This study investigates the effects of revenue diversification and cross border banking on bank risk and return. Using a panel dataset of 320 banks across 29 African countries between the period of 2002- 2013 and a new methodological approach, System Generalized Method of Moments estimators (System GMM), the results in this thesis provide the following empirical evidence: first cross border banking increases revenue diversification as banks tend to diversify their revenue as a result of the competition they face when they engage in cross border banking. Second, while cross border banking does not influence the risk and return of banks revenue diversification increases the profitability of banks in Africa. Third, the sensitivity of cross border banking and revenue diversification not only improve bank profitability, it also enhance stability. The major contribution of this thesis to literature are as follows: first, the use of System GMM in this thesis thoroughly, addresses the endogeneity issue related to the diversification strategy of banks. Second, this thesis is the first in considering the effect of cross border banking on revenue diversification in Africa. Furthermore, considering how the interaction of cross border banking and revenue diversification impact on risk and return of banks particularly in developing and emerging economies is also new in literature. Finally, the empirical results provides important public policy considerations: The strong positive association between cross border banking and revenue diversification suggest there is no compelling reason to restrict banks activity. In addition, the role of cross border banking and revenue diversification on risk and return help in understanding the channels through which cross-border banking and revenue diversification can deepen financial systems, minimize risks from cross-border banking, while maximizing its benefit.