Banking income diversification and market power (PMG approach)

Nowadays, improving income diversification has become very important by changing the income portfolio from lending activities to non-lending activities and it is mentioned as a factor that strengthens the market power in banks. On the other hand, improving the market power of banks can have a significant impact on their income diversity. The purpose of this study is to investigate the relationship between income diversity and market power in the Iranian banking system, which has been conducted using the pooled mean group (PMG) method in a sample of 18 banks in the country from the years 2012 to 2021. Market power also helps banks take advantage of growth opportunities in non-traditional businesses, which leads to an increase in the fee-based income ratio in the banks' revenue structure, and government-affiliated banks have taken advantage of these opportunities and generated more non-interest income than their private counterparts. Based on the results of the present study, there is a positive and significant relationship between the banks’  non-traditional income and market power. According to the obtained results, it is suggested that banks consider income diversification policy with special attention.