Effects of income diversification on the stability of Southeast Asian banks in the context of digital transformation of the economy

Abstract

Purpose This study aims to examine and estimate the impact of the transformation of banking operations from traditional banking to digital banking and income diversification on the stability of banks in Southeast Asian countries during the period from 2006 to 2021. Design/methodology/approach The study uses a Bayesian model to examine the impact of digital transformation (represented by the variables: BIS: Number of broadband internet subscribers, in thousands; and MB100: Number of mobile phone subscribers, per 100 people LN) along with bank income diversification represented by (LA: Bank liquid assets compared to deposits and short-term capital sources; and NII: Bank non-interest income compared to total income, in percent) on the stability of banks (represented by ZCORE: Z-score of the banking system). Data are taken from 2006 to 2021 at annual frequency in 10 countries: Brunei, Cambodia, Indonesia, Laos, Myanmar, Thailand, East Timor, Singapore, Malaysia and Vietnam. In addition, the study also conducts a robustness test of the research model through the use of ordinary least squares, fixed effects model, random effects model and feasible generalized least squares models. Findings When banks diversify their non-interest income, it creates positive effects on bank stability by reducing their dependence on traditional credit business activities, which contain many potential risks. However, the banking sector of Southeast Asian countries is in the early stages of digital transformation, so the cost of digitalization creates great pressure on financial capital flows and causes weakening of bank stability. Practical implications Cost is an issue that needs to be considered for the digital transformation process of banks. Banks can take advantage of technologies and technology transfer activities from advanced countries to shorten the time and reduce costs for the digitalization process of business activities. National development policies need to aim at equipping modern technology infrastructure to create an advanced ecosystem to support the digital transformation activities of banks. Banks need to integrate income diversification and digital transformation to aim for stable and sustainable development in the long term. Originality/value This study provides empirical evidence on the dual impact of income diversification and digital transformation on the stability of Southeast Asian banks. The study proposes several recommendations for policymakers to aim at achieving stable and sustainable growth for banks in Southeast Asia.