American Journal of Economics and Business Administration

The Effect of Diversification of Banking Products on the Relationship between Market Power and Financial Stability

Sami Mensi and Widede Labidi

DOI : 10.3844/ajebasp.2015.185.193

American Journal of Economics and Business Administration

Volume 7, Issue 4

Pages 185-193

Abstract

In the context of financial liberalization, increased competition has spurred financial institutions to develop new products and new activities in order to meet demand, market development and increased competitiveness. This has made the relationship between market structure and financial stability more complicated and its study through the channel of diversification remains an unexplored area. The purpose of this paper is to test the interaction between market power, diversification and financial (in) stability. To this end, we examine a sample of 18 countries in the MENA region and 157 commercial banks during the period 2000-2013. Supporting the "competition-instability" hypothesis, our results revealed that low market power banks in the MENA region are less robust and more unstable when they less or poorly diversify their activities. Moreover, financial instability in this sector may result from a fierce competition among banks born from the desire to distinguish themselves by offering various nontraditional products, for which banks lack the experience to control its risks.

Copyright

© 2015 Sami Mensi and Widede Labidi. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.