Income diversification and profitability of banks: Evidence from Ghana’s banking sector

Abstract

Non-interest income accounts for a significant percentage of operating income of commercial banking industry. However, current studies on income diversification and profitability of banks have centered on the implications of diversification without investigating the threshold effects and transmission channels through which income diversification affects banks’ profitability. The study addresses these gaps in the literature relying on panel data from 10 banks in Ghana spanning 2006–2016. We employ both the fixed and random estimation approaches. The study finds that, while increased diversification proxied by non-interest income is associated with higher profitability of banks in Ghana, the effect is not robust. Further results also suggest that, the effect of income diversification on profitability is monotonic and does not show evidence of threshold. On the channels of manifestation, the study observes that, income diversification increases profitability and non-performing loans heighten the positive relationship between non-interest income and profitability.