The impact of diversification on financing risk in the dual banking system

• Main Authors: Isa, Mohamad Yazid, Ibrahim, Mansor, Mohd, Shamsher
• Format: Conference or Workshop Item
• Language: English
• Published: 2017
• Subjects: HG Finance
• Online Access: http://repo.uum.edu.my/24583/1/SICONSEM%202017%20149%20150.pdf; http://repo.uum.edu.my/24583/
• Institution: Universiti Utara Malaysia

Purpose - The issue of diversification concentration strategy apparently is experienced by both commercial banks and Islamic banks and this experience is unique in nature especially for a country such as Malaysia because of the existence of dual banking system.This paper investigates the impact of lending strategies (diversification or concentration) on the risk performances of commercial banks and Islamic banks in Malaysia.In general, there are two different views on the diversification-concentration debate. On one side, the proponent of diversification posits that bank should diversify in minimizing unsystematic risk (Templeton & Severien, 1992), reducing cost inefficiency (Rossi et. al, 2009) and improving bank performances (Deng et. al, 2007).On the other side, the proponent of concentration strategy suggests that diversification tends to reduce profits (Berger et. al, 2010) and increase systematic risks (Wagner, 2010) Methodology - This main data was collected from 24 banks annual report for the period of 2005 to 2015.This paper applies two techniques in measuring diversification level of loan and financing portfolio which are Herfindahl-Hirschman Index (HHI) and Shannon Entropy (SE). Panel data techniques (Random and Fixed Effect Models) are used to investigate the impact of loan and financing strategies on bank risk performances.Findings - In general Malaysian banks seem to have diversified loan portfolio based on type of customer.Malaysian commercial banks are found to be more diversified in loan portfolio by customer with HHI values between 0.36 and 0.40 compare to Islamic banks (between 0.43 and 0.52).The empirical findings also suggest that concentration strategy is better for Islamic banks (not for commercial banks) in term of risk performances.