Evaluating the Effects of Scope Economies of Diversification of loans on Bank’s Return Criteria

Document Type : Research Paper

Authors

1 University of Tabriz

2 Associate Professor of Economics, University of Tabriz

Abstract

Banks play a very important role in the payment system, monetary policy, transaction cost reduction, risk management, as well as in the process of transition to a market economy. Given the importance of banks in the economy, it is essential to pay attention to their performance and improve their returns. One of the factors that affects the return of the banks is the decisions related to the diversification of the bank's services and activities. Diversifying banking services brings benefits on the one hand and costs on the other. Therefore, it is very important to study the effects of diversification on bank’s return. In this paper, in order to investigate the economies of diversification of bank loans on bank's return criterion, the nonlinear cost function related to selected Iranian banks and quasi-diversification economies of bank loans in the form of four different scenarios - including bank focus On civil partnership loans, Mudaraba loans, Jualah loans and other bank loans- it has been studied during the period 2006-2017. Also, using the censored regression model (Tobit model), the impact of quasi-diversification economies of loans on the bank's return criterion has been evaluated. The results show that in different scenarios, quasi-diversification economies in bank loans have a different effect on the bank's rate of return. If banks focus on loans based on civil participation, Mudaraba and other loans, diversification will increase the return of the banks. On the other hand, if the banks focus on Jualah loans, diversifying bank loans will reduce return.

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References

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