Income diversification, corruption, and bank risk

Corruption is a critical socio-political factor often overlooked in the income diversification and bank risk literature. This study fills the lacuna by examining how the level of corruption affects income diversification and bank risk nexus. We employ the two-step System GMM approach in modeling annual data of 714 banks across 51 African countries from 2011 to 2019 and find that income diversification reduces bank risk and improves bank stability, but corruption significantly increases bank risk. We also find that the influence of income diversification on bank risk is offset by the extent of corruption, implying that diversification gains are obliterated in corrupt banking environments. These findings imply that policymakers in African countries should prioritize reducing corruption to ensure the effectiveness of income diversification strategies in enhancing bank stability. The heterogeneous analyses confirm that the level of corruption significantly weakens the benefit of diversification, regardless of the measure of corruption, bank size (large or small), status (listed or unlisted), and regional block. The results of the study have important implications for policymakers, bank regulators, investors, and bank managers seeking to promote the stability of banks, especially in Africa.