The aim of this study is to determine how bank diversification affects bank stability. To this end, it examines data of 136 commercial banks operating in 14 MENA (Middle East and North Africa) countries observed from 2005 to 2021, using the System Generalized Method of Moments (GMM) panel data regression analysis. The selected countries are Bahrain, Egypt, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, Morocco, Lebanon, Algeria, Tunisia, Iran, Iraq, and the United Arab Emirates. The main results point to the enhancing effect of income diversification on bank stability. Our results underline the “Bright Side” of banking income diversification in the MENA region. However, this stabilizing income diversification effect is not always maintainable. The results also point to a non-linear relationship between interest/non-interest income and financial stability, suggesting that higher diversification reduces risk. We use a dynamic panel threshold model to determine income diversification thresholds that stabilize banks in the MENA region.

Abuzayed, B., Al-Fayoumi, N. & Molyneux, P. (2018). Diversification and bank stability in the GCC. Journal of International Financial Markets, Institutions and Money, 57, 17–43.

Adem, M. (2023). Impact of income diversification on bank stability: a cross-country analysis. Asian Journal of Accounting Research, 8(2), 133–144. https://doi.org/10.1108/AJAR-03-2022-0093

Allen, F., Babus, A. & Carletti, E. (2012). Asset commonality, debt maturity and systemic risk. Journal of Financial Economics, 104, 519–534.

Amidu, M. & Wolfe, S. (2013). Does bank competition and diversification lead to greater stability? Evidence from emerging markets. Review of Development Finance, 3, 152–166.

Ammar, N. & Boughrara, A. (2019). The impact of revenue diversification on bank profitability and risk: evidence from MENA banking industry. Macroeconomics and Finance in Emerging Market Economies, 12(1), 36–70.

Ben Lahouel, B., Taleb, L., Kočišová, K. & Ben Zaied, Y. (2023). The threshold effects of income diversification on bank stability: an efficiency perspective based on a dynamic network slacks-based measure model. Annals of Operations Research, 330(1), 267–304.

Ben Lahouel, B., Taleb, L., Kossai, M. (2022). Nonlinearities between bank stability and income diversification: A dynamic network data envelopment analysis approach. Expert Systems with Applications, 207, 117776. https://doi.org/10.1016/j.eswa.2022.117776

Ben Naceur, S. & Omran, M. (2011). The effects of bank regulations, competition, and financial reforms on banks’ performance. Emerging Markets Review, 12(1), 1–20.

Berger, A. N., Kashyap, A. & Scalise, J. (1995). The transformation of the U.S. banking industry: What a long, strange trip it’s been. Brookings Papers on Economic Activity, 2, 55–218.

Berger, A., Hasan, I. & Zhou, M. (2010). The effects of focus versus diversification on bank performance: evidence from Chinese banks. Journal of Banking & Finance, 34(2), 1417–1435.

Berger, P. & Ofek, E. (1996). Bustup takeovers of value-destroying diversified firms. Journal of Finance, 51(4), 1175–1200.

Blundell, R. & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143.

Boyd, J. & Gertler, M. (1994). The role of large banks in the recent US banking crisis. Federal Reserve Bank of Minneapolis Quarterly Review, 18, 2–21.

Boyd, J. & Prescott, E. (1986). Financial intermediary-coalitions. Journal of Economic Theory, 38(1), 211–232.

Boyd, J. H. & Graham, S. L. (1986). Risk, regulation, and bank holding company expansion into nonbanking. Quarterly Review, 10(2), 2–17.

Creane, S., Goyal, R., Mobarak, A. M. & Sab, R. (2004). Financial sector development in the middle east and North Africa. IMF Working Papers.

De Jonghe, O. (2010). Back to the basics in banking? A micro-analysis of banking system stability. Journal of Financial Intermediation, 19, 387–417.

Demirguc-Kunt, A. & Huizinga, H. (2010). Bank activity and funding strategies: The impact on risk and returns. Journal of Financial Economics, 98, 626–650.

Demsetz, R. S. & Strahan, P. E. (1995). Diversification, size and risk at bank holding companies. Journal of Money, Credit and Banking, 29(3), 300–313.

DeYoung, R. & Torna, G. (2013). Nontraditional banking activities and bank failures during the financial crisis. Journal of Financial Intermediation, 22, 397–421.

Edwards, F. R. & Mishkin, F. S. (1995). The decline of traditional banking: Implications for financial stability and regulatory policy. National Bureau of Economic Research, w4993.

Gallo, J. G., Apilado, V. P. & Kolari, J. W. (1996). Commercial bank mutual fund activities: Implications for bank risk and profitability. Journal of Banking and Finance, 20, 1775–1791.

Gambacorta, L., Scatigna, M. & Yang, J. (2014). Diversification and bank profitability: a nonlinear approach. Applied Economics Letters, 21(6), 438–441.

Gauthier, C., Lehar, A. & Souissi, M. (2013). Macroprudential capital requirements and systemic risk. Journal of Financial Intermediation, 21, 594–618.

Heggestad, A. (1975). Riskiness of investments in nonbank activities by bank holding companies. Journal of Economics and Business, 27, 219–223.

Hidayat, W. Y., Kakinaka, M. & Miyamoto, H. (2012). Bank risk and non-interest income activities in the Indonesian banking industry. Journal of Asian Economics, 23, 335–343.

Hsieh, M. F., Chen, P. F., Lee, C. C. & Yang, S. J. (2013). How does diversification impact bank stability? the role of globalization, regulations, and governance environments. Asia-Pacific Journal of Financial Studies, 42(5), 813–844.

Johnson, R. D. & Meinster, D. R. (1974). Bank holding companies: Diversification opportunities in nonbank activities. Eastern Economic Journal, 1(4), 316–323.

Kaufman, G. G. & Mote, L. R. (1994). Is banking a declining industry? An historical perspective. Federal Reserve Bank of Chicago Economic Perspectives, 18(3), 2–21.

Kim, H., Batten, J. A. & Ryu, D. (2020). Financial crisis, bank diversification, and financial stability: OECD countries. International Review of Economics and Finance, 65, 94–104.

Köhler, M. (2015). Which banks are more risky? The impact of business models on bank stability. Journal of Financial Stability, 16, 195–212.

Lee, C. C., Hsieh, M. F. & Yang, S. Y. (2014). The relationship between revenue diversification and bank performance: Do financial structures and financial reforms matter? Japan and the World Economy, 29, 18–35.

Lepetit, L. & Strobel, F. (2013). Bank insolvency risk and time-varying z-score measures. Journal of International Financial Markets, Institutions and Money, 25, 73–87.

Lepetit, L., Nys, E., Rous, P. & Tarazi, A. (2008). Bank income structure and risk: an empirical analysis of European banks. Journal of Banking & Finance, 32(8), 1452–1467.

Litan, R. E. (1985). Evaluating and controlling the risks of financial product deregulation. Yale Journal on Regulation, 3, 1–52.

Mercieca, S., Schaeck, K. & Wolfe, S. (2007). Small European banks: Benefits from diversification? Journal of Banking & Finance, 31(7), 1975–1998.

Meslier, C., Tacneng, R. & Tarazi, A. (2014). Is bank income diversification beneficial? Evidence from an emerging economy. Journal of International Financial Markets, Institutions & Money, 31, 97–126.

Moudud-Ul-Huq, S., Ashraf, B. N., Das Gupta, A. & Zheng, C. (2018). Does bank diversification heterogeneously affect performance and risk-taking in ASEAN emerging economies? Research in International Business and Finance, 46(C), 342–362.

Olson, D. & Zoubi, T. A. (2011). Efficiency and bank profitability in MENA countries. Emerging Markets Review, 12(2), 94–110.

Ovi, N., Bose, S., Gunasekarage, A. & Shams, S. (2020). Do the business cycle and revenue diversification matter for banks’ capital buffer and credit risk: Evidence from ASEAN banks. Journal of Contemporary Accounting and Economics, 16(1), 100186. https://doi.org/10.1016/j.jcae.2020.100186

Paltrinieria, A., Dreassib, A., Rossic, S. & Khand, A. (2020). Risk-adjusted profitability and stability of Islamic and conventional banks: Does revenue diversification matter? Global Finance Journal, 50, 100517. https://doi.org/10.1016/j.gfj.2020.100517

Pennathur, A. K., Subrahmanyam, V. & Vishwasrao, S. (2012). Income diversification and risk: does ownership matter? An empirical examination of Indian banks. Journal of Banking & Finance, 36(8), 2203–2215.

Roland, K. P. (1997). Profit persistence in large U.S. bank holding companies: An empirical investigation. Office of the Comptroller of the Currency, Economics Working Paper, 97(2).

Sanya, S. & Wolfe, S. (2011). Can banks in emerging economies benefit from revenue diversification? Journal of Financial Services Research, 40(1), 79–101.

Schoenmaker, D., Slijkerman, J. F. & De Vries, C. G. (2005). Risk diversification by European financial conglomerates. Tinbergen Institute Discussion Paper.

Servaes, H. (1996). The value of diversification during the conglomerate merger wave. The Journal of Finance, 51(4), 1201–1225.

Shabir, M., Jiang, P., Bakhash, S. & Zhao, Z. (2021). Economic policy uncertainty and bank stability: Threshold effect of institutional quality and competition. Pacific-Basin Finance Journal, 68(C).

Shabir, M., Jiang, P., Shahab, Y., et al. (2024). Diversification and bank stability: Role of political instability and climate risk. International Review of Economics & Finance, 89(PB), 63–92.

Shahriar, A., Mehzabin, S. & Azad, M. A. K. (2023). Diversification and bank stability in the MENA region. Social Sciences & Humanities Open, 8(1), 100520.

Shim, J. (2018). Loan portfolio diversification, market structure and bank stability. Journal of Banking and Finance, 104, 103–115.

Sinkey, J. F. & Nash, R. C. (1993). Assessing the riskiness and profitability of credit-card banks. Journal of Financial Services Research, 7, 127–150.

Stiroh, K. J. & Rumble, A. (2006). The dark side of diversification: The case of US financial holding companies. Journal of Banking & Finance, 30(8), 2131–2161.

Stiroh, K. J. (2004). Diversification in banking: Is noninterest income the answer? Journal of Money, Credit, and Banking, 36(5), 853–882.

Wagner, W. (2011). Systemic liquidation risk and the diversity–diversification trade-off. Journal of Finance, 66, 1141–1175.

Wall, L. D. & Eisenbeis, R. A. (1984). Risk considerations in deregulating bank activities. Federal Reserve Bank of Atlanta Economic Review, 69, 6–19.

Williams, B. (2016). The impact of non-interest income on bank risk in Australia. Journal of Banking & Finance, 73, 16–37.

Wu, J., Chenb, L., Chenc, M. & Jeon, B. N. (2020). Diversification, efficiency and risk of banks: Evidence from emerging economies. Emerging Markets Review, 45, 100720. https://doi.org/10.1016/j.ememar.2020.100720.

Wu, M., Tortosa-Ausina, E. & Cruz-García, P. (2024). The impact of diversification on the profitability and risk of Chinese banks: evidence from a semiparametric approach. Empirical Economics. https://doi.org/10.1007/s00181-024-02619-7

Yang, H. F., Liu, C. L. & Chou, R. Y. (2019). Bank Diversification and Systemic Risk. Quarterly Review of Economics and Finance, 77(C), 311–326.