Loan diversification and Net Interest Margins in Asia: does global uncertainty matter?

This study offers novel empirical evidence on how global uncertainty moderates the relationship between loan diversification and Net Interest Margins in the banking sectors of selected Asian economies. Drawing on the World Uncertainty Index as an exogenous proxy for macro-level uncertainty, we employ a dynamic panel estimation using the two-step System Generalized Method of Moments on a sample with 143 banks across eight Asian countries and territories from 2008 to 2023. The analysis shows that higher global uncertainty significantly reduces NIMs, weakening traditional intermediation profitability. Loan diversification also lowers NIMs, indicating diminished pricing power in competitive markets. Notably, the interaction term reveals that this adverse effect is exacerbated under elevated global uncertainty. These findings align with transaction cost economics, agency theory, and adaptive management perspectives, highlighting global uncertainty as a key moderator of bank margin dynamics and offering policy insights for regulatory frameworks and strategic asset allocation in emerging markets.