The moderating effect of bank competition on the relationship between income diversification and the sustainable growth of banks within WAMZ

Abstract

In emerging economies, especially in the West African Monetary Zone (WAMZ), where banks predominate in financial intermediation despite macroeconomic uncertainty, the financial sustainability of banks remains a major policy concern. This study adds two important new findings to the existing literature by examining the impact of income diversification on banks' long-term growth. First, this study employs the sustainable growth rate as the primary performance metric, capturing banks' capacity to expand internally without external funding, in contrast to most earlier studies that focus on short-term profitability or stability metrics. Second, the study provides new evidence on how market structure influences the efficacy of income diversification strategies by explicitly modeling bank competition as an interaction factor in the relationship between income diversification and sustainable growth rate. Using an unbalanced panel of 24 listed banks from Ghana and Nigeria over the period 2015-2024, and a dynamic two-step system generalized method of moments estimator to address endogeneity and persistence, the results show that income diversification greatly improves banks' sustainable growth. More significantly, there is a positive and statistically significant interaction between income diversification and bank competition, suggesting that higher pricing power and more intense competition increase the advantages of income diversification. These results extend the banking literature by demonstrating that the impact of income diversification on long-term growth is conditional on bank market structure. The study presents important policy implications for regulators in the WAMZ, emphasizing the need to promote prudent income diversification strategies alongside a competitive banking environment to enhance financial sustainability.