Non-traditional banking and income diversification in the GCC region.

Abstract

This paper examines the determinants of non-traditional banking activities (NTBAs) and their effects on profitability and stability in GCC banks, using panel data from 94 banks over 2012–2022. It contributes to the GCC banking literature by providing a disaggregated analysis of non-interest income within a dual banking system. The results show that more profitable banks are more likely to engage in NTBAs, while less stable and less liquid banks also rely more on NTBAs. NTBAs are positively associated with profitability but negatively associated with stability, whereas diversification, both between interest and non-interest income and within non-interest income sources, is negatively associated with profitability and stability. The profitability benefits of NTBAs are stronger for Islamic banks. These findings suggest that diversification may increase operational complexity rather than reduce risk. From a policy perspective, the results highlight the need for stronger risk governance and managerial capabilities to support sustainable banking performance.