IMPACT OF INCOME DIVERSIFICATION ON BANK PERFORMANCE: SPECIAL REFERENCES TO LICENSED COMMERCIAL BANKS IN SRI LANKA

Abstract

Banks have diversified their income sources by performing new activities such as underwriting and trading securities, brokerage and investment banking and other activities which generate non-interest income to the bank. Non- interest income considered as an important source of income diversification for the bank. The main objective of this study is to find the impact of income diversification on bank performance special references to commercial banks in Sri Lanka by considering 11 year period from 2006-2016. Ten licensed commercial banks were selected based on highest market capitalization. Study was done using quantitative research methods with deductive approach and the secondary data was gathered from final financial statements of each bank. The performance measures are return on equity and return on assets while income diversification measured by the diversification index. Additionally four control variables (bank size, financial leverage, growth rate and lending strategy) were used. Panel data regression used as main analytical tool as the data set contain cross sections and time series nature of the data. According to the findings of this study it can be concluded that there is a significant positive impact of income diversification and bank performance in Sri Lanka (Both Return on Assets and Return on Equity). As well as, bank size has a significant positive impact on bank performance in both Return on Assets and Return on Equity models. Financial leverage has a significant positive impact on Return on Assets and it insignificantly related with Return on Equity. However, growth rate and lending strategy has insignificant impact on bank performance. Finally, it is concluded that income diversification has significant positive impact on bank performance. Therefore, this study can be refer to banking industry to improve overall goals, objectives, and ultimately to enhance their bank performance.