How diversification affects bank performance: The role of human capital

Abstract

Abstract Previous studies have examined the effects of diversification on bank performance without taking into account the role of human capital. The aim of this paper is to make an attempt to investigate whether bank human capital efficiency has moderating effects on the relationships between diversification and bank performance. Using a sample of 400 commercial banks operating in 34 African countries over the 2005–2015 period, we find that higher diversification reduces bank performance while higher levels of human capital efficiency are positively associated with bank performance. We also find that the performance-reducing effects of diversification decrease as bank human capital efficiency improves. These results are consistent regardless of different alternative measures of diversification and performance. Our findings provide valuable insights into the importance of the development of human capital to the diversification of banking activities.