Should income be diversified? A dynamic panel data analysis of Nepalese depository financial institutions

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This study analyzes the possible impact of diversity in non-interest income on Nepalese Depository Financial Institutions (DFIs) performance. The study examines variables such as service fees, dividends on equity instruments, and the non-interest revenue ratio to total operational income as endogenous factors. The ROE serves as the key profitability indicator. Additionally, the study explores the impact of control variables on the performance of financial institutions, such as the cost-to-income ratio, the equity-to-total assets ratio, and the ratio of non-performing loans to total loans. Secondary data from fiscal year 2015/16 to 2021/22 are utilized for analysis, employing correlation and regression analyses to assess the relationships between variables. Based on the Hausman Specification test, this study uses a Dynamic Analysis of Panel Data approach, adopting a Random effects regression model. The findings indicate that dividends from equity instruments ( = –0.565*) adversely affect profitability. At the same time, service fees and non-interest revenue as a proportion of overall operating revenue show no significant impact. Control factors like the cost-to-income ratios ( = –0.432**) and the equity-to-total assets ( = –94.101**) adversely affect profitability. The study suggests that income diversification may not be beneficial, urging Nepalese DFIs to prioritize interest income and consider alternative investment opportunities. Reducing the cost-to-income ratios and equity-to-total assets is recommended for enhancing profitability.

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    • Figure 1. Conceptual framework
    • Table 1. Sample DFIs
    • Table 2. Descriptive statistics
    • Table 3. Correlation matrix
    • Table 4. Regression analysis
    • Table 5. Variance inflation factor
    • Table 6. Hausman specification test
    • Table 7. Breausch-Pagan Lagrangian multiplier test
    • Table 8. Heteroscedasticity tests
    • Table 9. Summary of hypothesis testing
    • Conceptualization
      Dipendra Karki, Ganesh Bhattarai, Rewan Kumar Dahal
    • Data curation
      Dipendra Karki, Ganesh Bhattarai, Rewan Kumar Dahal
    • Formal Analysis
      Dipendra Karki, Ganesh Bhattarai, Kunti Dhami
    • Investigation
      Dipendra Karki, Ganesh Bhattarai, Rewan Kumar Dahal
    • Methodology
      Dipendra Karki, Ganesh Bhattarai, Rewan Kumar Dahal
    • Project administration
      Dipendra Karki, Kunti Dhami
    • Software
      Dipendra Karki, Ganesh Bhattarai, Kunti Dhami
    • Visualization
      Dipendra Karki, Ganesh Bhattarai, Kunti Dhami
    • Writing – original draft
      Dipendra Karki, Ganesh Bhattarai, Rewan Kumar Dahal, Kunti Dhami
    • Writing – review & editing
      Dipendra Karki, Ganesh Bhattarai, Rewan Kumar Dahal
    • Resources
      Ganesh Bhattarai, Rewan Kumar Dahal, Kunti Dhami
    • Validation
      Ganesh Bhattarai, Rewan Kumar Dahal, Kunti Dhami
    • Funding acquisition
      Ganesh Bhattarai, Rewan Kumar Dahal, Kunti Dhami
    • Supervision
      Rewan Kumar Dahal, Kunti Dhami