Purpose: This study empirically examines the impact of income diversification on the profitability and insolvency risk of private commercial banks in Bangladesh. As banks increasingly shift toward non-interest income sources amid growing competition and declining interest margins, understanding the trade-off between diversification benefits and associated risks becomes crucial for emerging economies. This study specifically addresses who benefits from its findings and how the results can be applied in practice. Methodology: The study employs a balanced panel dataset of 18 listed private commercial banks in Bangladesh over a ten-year period (2015–2024). Income diversification is measured using the Herfindahl-Hirschman Index (HHI), while profitability is captured through Return on Assets (ROA) and Return on Equity (ROE). Insolvency risk is proxied by the Z-score. Static panel models (Fixed Effects and Random Effects) are estimated following Hausman specification tests, with robustness checks for heteroskedasticity, autocorrelation, and multicollinearity. Findings: The results reveal a diversification discount in the Bangladeshi banking sector. Income diversification (lower HHI) significantly enhances both ROA (? = -0.0177, p < 0.01) and ROE (? = -1.0026, p < 0.01), confirming that diversified banks achieve higher profitability. However, diversification simultaneously increases insolvency risk, as evidenced by the negative relationship between diversification and Z-score (? = 3.6821 for HHI, p < 0.01). Among control variables, the equity-to-assets ratio (LEVR) and loan-to-deposit ratio (LTDR) emerge as consistently significant determinants of both profitability and stability. Practical Utility and Significance: This study provides direct, actionable value to multiple stakeholders. Bank managers can use the findings to optimize revenue mixes by identifying which diversification strategies enhance returns without excessive risk. Bangladesh Bank (the central regulator) gains empirical evidence to formulate diversification-related capital buffers, risk-weight adjustments, and early warning indicators. Policymakers preparing for Bangladesh's LDC graduation receive data-driven inputs for financial sector reforms. Investors and analysts can incorporate diversification metrics into bank valuation and risk assessment models. Originality: This study contributes to the limited literature on income diversification in Bangladesh's banking sector by: (i) utilizing the most recent decade-long dataset (2015–2024); (ii) simultaneously examining both profitability and insolvency risk within a unified framework; (iii) providing empirical evidence of the diversification discount phenomenon in an emerging economy context; and (iv) explicitly linking findings to practical decisions for regulators, managers, and investors.
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