Diversification and Banks’ Funding Costs in Africa: The Role of Financial Regulations

Israel Odion E. Idewele PhD; Samuel N. Nwosu Ph.D

doi:10.56201/jafm.vol.12.no6.2026.p588.603

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Diversification and Banks’ Funding Costs in Africa: The Role of Financial Regulations

Israel Odion E. Idewele PhD, Samuel N. Nwosu Ph.D

Abstract

This study examines the relationship between diversification, financial regulations and banks’ funding costs. A sample of 563 banks operating across 53 African countries over the period 2007–2021 was selected based on the availability of data. This study employs fixed effects model as the main estimation approach, along with two-stage least squares (2SLS) and generalized method of moments estimation technique for robustness test. The study’s results indicate that diversification significantly lowers banks’ cost of funds in Africa. The analysis also reveals that revenue diversification has a more pronounced impact on large and international banks. Furthermore, the study identifies an indirect effect of financial regulations on banks’ funding costs through revenue diversification. The study highlights the need for bank managers, particularly those in large international banks, to proactively adopt diversification strategies to optimize their funding structures and reduce costs effectively. The study provides insights into the broader implications of the interactions between regulatory frameworks, bank diversification, and funding costs in Africa. The banking literature suggests that banks can reduce their funding costs by optimizing their deposit mix to prioritize low-cost accounts, managing capital efficiently, and employing diversification strategies to attract more cost-effective funding sources. While the roles of deposit mix optimization and capital management in lowering funding costs are well-documented, the impact of diversification remains relatively underexplored, particularly in developing countries.

Keywords

revenue diversification; assets diversification; financial regulations; banks’ funding costs; Africa.

References

list of the article for more information: https://doi.org/10.4102/sajems.v28i1.5809. ROA, return on assets; AADIV, adjusted asset diversification; ADIV, asset diversification; ARDIV, adjusted revenue diversification; GDP, gross domestic product; LM, Lagrange multiplier; AR (2), Arellano–Bond test; RDIV, revenue diversification; Coeff, coefficient; SE, standard error. ***, **and*indicatestatisticalsignificanceat1%,5%and 10%. The impact of bank size Research (e.g., Opoku Mensah et al. 2017; Tran, Nguyen & Hoang 2024) indicates that the relationship between funding costs, financial rules, and diversification can differ dramatically between banks of different sizes. Large banks usually have more resources and market access, which allows them to effectively manage complicated financial rules and diversify risks over a wider range of assets (Shabir et al. 2024).The advantages of diversification in reducing finance costs may be strengthened as a result. Smaller banks, on the other hand, frequently have fewer resources and suffer comparatively greater compliance costs, which can lessen the effectiveness of diversification and make funding costs more susceptible to regulatory pressure (Andrieș & Sprincean 2023). Therefore, this study further investigates the impact of diversification on banks' funding costs and the indirect role of financial regulations across different levels of bank size by re-estimating equations (1)(9) for small and large banks in order to explore the possibility that large banks benefit from lower funding costs. According to Andrie André and Sprincean (2023), banks are categorized as small in this article if their total assets are below the 50th percentile of the total assets of banks operating in nation j, and as large if their total assets are above the 50th percentile. Table 6 presents the results. The revenue diversification coefficient for large banks is still substantially negative, as indicated in columns (1)–(2). However, as shown in columns (7)–(8), this important influence vanishes for tiny banks. JAFM JAFM TABLE6: Effects of size on diversification and banks funding costs relationship. Variable Su b- PanelA:S mallbank s PanelB: Largeba nks variable FE 2SLS GM M FE 2SL S GMM 1 2 3 4 5 6 7 8 9 10 11 12 Revenuediversification L.Funding costs Coeff - - 0.51 6*** 0.55 3*** - - - - 0.558 *** 0.56 0*** SE - - - - 0.02 9 0.02 9 - - - - 0.00 9 0.00 7 RDIV Coef f – 0.013 * - – 0.10 8 - – 0.005 - – 0.022 *** - – 0.1 52 - – 0.030 *** - SE 0.00 7 - 0.16 5 - 0.00 6 - 0.007 - 0.1 38 - 0.00 2 - ARDIV Coef f - – 0.01 2* - – 0.03 1 - – 0.005 - – 0.024 *** - – 0.3 24 - – 0.027 *** SE - 0.00 7 - 0.13 5 - 0.00 6 - 0.006 - 0.2 81 - 0.00 2 Control variables - Yes Yes Yes Yes Yes Yes Yes Yes Yes Ye s Yes Yes Observation s - 1840 1837 181 4 1810 158 3 1581 1549 1549 154 5 154 5 1378 137 8 R-squared - 0.08 8 0.08 7 - - - - 0.257 0.259 - - - - Year fixed effects - Yes Yes Yes Yes Yes Yes Yes Yes Yes Ye s Yes Yes LMtestp- value - - - 0.25 1 0.16 2 - - - - 0.1 32 0.3 99 - - AR2 - - - - - 0.30 9 0.36 1 - - - - 0.41 7 0.42 5 Sargantestp- value - - - - - 0.14 7 0.23 6 - - - - 0.99 9 0.99 9 Assets diversificati on

Diversification and Banks’ Funding Costs in Africa: The Role of Financial Regulations

Abstract

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