Abstract:
Conventional perception in banking disputes that diversification tends to minimize
bank risk and improve performance. This paper addresses this important strategy by
evaluating the empirical relationship between bank income diversification and bank
performance. The main objective of the study is to investigate the impact of income
diversification on bank performance of Sri Lankan listed commercial banks. The lack
of researchers regarding this topic under Sri Lankan banks and need of investigating
the strategies to face the high competition within commercial banks in Sri Lankan
context motivated the researcher to conduct a study regarding this area. This data
set of the study covers Sri Lankan commercial banks during the sample period of
2010-2014. Data utilized in this study were extracted from the statement of
comprehensive income and statement of financial position of listed banks in Colombo
Stock Exchange (CSE) database. There are some control variables like asset size,
equity and asset growth added to the model to ensure that there is no any effect for
the relationship between bank income diversification and bank performance. Based
on the findings of the research there is a positive relationship between bank income
diversification and bank performance despite the fact that degree of diversification
being not in the peak within Sri Lankan context. Additionally, asset size and asset
growth variables are not significant variables to the both ROA and ROE models due
to lack of risk management, information technology, human capital, geographical
diversification and lower cost of capital within commercial banks in Sri Lankan
context. But equity variable shows a significant negative relationship with bank
performance in both models.
