A Theoretical Survey

Abstract The banking industry in the entire world has experienced tremendous diversification levels spurred by the sector liberalization and deregulation in the last two decades. This is especially so because of the competitive pressure that has resulted from non-bank institutions entry into the sector as well as the resulting reductions in cost efficiencies and profit margins earlier associated with the intermediation business. While banks have resolved to creative diversification strategies to overcome the profit compression and competition pressure, a number of questions central to this practice still linger and which this paper seeks to address. First, what is diversification in banking? Though, it is clearly defined in strategic management literature, the true meaning of diversification in banking has remained elusive. Secondly, what is the theoretical motivation behind firms and managers pursuit of diversification? Lastly, what are the avenues through which banks can execute a diversification strategy? The research find out that bank diversification is best understood by disaggregating the various elements that constitute the operations, assets and liabilities of commercial banks and can be defined as the conglomeration of different activities, income sources, assets and liabilities in banking operations. The theoretical diversification of diversification stems from the search for market power hypothesised in market power theory, the exploitation and utilization of resource bundles to attain sustainable competitive advantage as proposed by the resource based view theory or pursuing of managerial self interests hypothesised in agency theory. The common approaches through which banks pursue diversification are income diversification, assets diversification, credit diversification, geographical diversification and international diversificatio