Diversification, Ownership Structure, and Solidity of Banks in Era of Digitalisation

1. Introduction

The financial context has seen various fluctuations in recent years, which have disrupted and shaken the banking sector. Banking firms play a key role in economic development in all countries. As a result, the major challenge facing banks remains the level of risk, given that “preserving financial stability is a public good” (Scialom, 2011). In financial theory, it is recognised that diversification of the financial asset portfolio is necessary to reduce the level of risk. Banks then choose to diversify their operations to offer a full range of services and products to their customers. In this way, they hope to attract more customers in order to increase their market share, which will reduce the level of risk. In addition, the concept of corporate governance could be defined as the set of processes that are put in place to reduce conflicts of interest between managers and shareholders through a good governance structure to mitigate these conflicts and consequently increase the level of banking strength. In particular, according to Choi (2000), it is usually agreed that one of the root causes of a financial crisis is a deficient governance system. Governance mechanisms are therefore seen as factors in mitigating economic shocks. Under this umbrella, an increase in control techniques is necessary to ensure the stability of large financial institutions around the world. Poor control of banking firms and insufficient risk management are the main causes of financial crises. In addition, research analysing the relationship between the governance system and the level of banking stability has not paid much attention to the African context, particularly in Tunisia. It appears that the study concerned with banking risks is not complete if the impact of the ownership structure on the level of risk is not taken into account. In this research work, we try to identify and analyse the diversification of banking activities and governance mechanisms while taking into account the concept of ownership structure in banking firms and analysing their functions in explaining the level of risk. Using a sample composed of the 10 main Tunisian banks listed on the Tunis Stock Exchange over the period from 2002 to 2020 (19 years), we will therefore empirically analyse the relationship between the diversification of banking activities, the structure of properties, and the level of Tunisian banking risk. This raises the question: what is the impact of trading activity and governance mechanisms, specifically the ownership structure, on the level of risk of Tunisian banks? Therefore, this study aims to examine the effects of diversification of banking activity, ownership structure (concentration of ownership, public ownership, institutional ownership, and foreign ownership), and bank characteristics (capital, size, liquidity, profitability, GDP, and inflation rate) on the risk profile of Tunisian banks.