Impact of non-banking activities on the performance of commercial banks in Bangladesh: an empirical study

The banking sector of Bangladesh has been in need of non-banking activities due to increasing competition. This study explores the effect of non-banking activities on the financial performance of the commercial banks in Bangladesh. It utilizes secondary panel data from 37 commercial banks from 2010 to 2019 and uses the Panel Corrected Standard Error estimator. Off-balance sheet activities, unlike existing literature, and non-interest income have been used to indicate the non-banking activities of the banks, whereas Data Envelopment Analysis (DEA) based cost efficiency and traditional measures including return on assets, risk-adjusted return on assets, and risk-adjusted return on equity are the indicators used for measuring the performance. The results demonstrate that the non-banking activities significantly enhances the performance of banks. It is confirmed that higher diversification through off-balance sheet activities make the banks more profitable. In addition, banks focusing on non-interest income become more resilient and profitable. Thus, for the long-term viability, banks should search for other non-banking activities apart from traditional banking activities. In addition, banks should have an appropriate amount for each kind of non-banking activity so that it will not hamper the performance in the long run.