Bilal SARWAR, Noor MUHAMMAD, Nadeem Uz ZAMAN / Journal of Asian Finance, Economics and Business Vol 7 No 7 (2020) 349 – 360 349 349 Print ISSN: 2288-4637 / Online ISSN 2288-4645 doi:10.13106/jafeb.2020.vol7.no7.349 1 First Author and Corresponding Author. Ph.D. Scholar, Department of Management Sciences, Faculty of Management Sciences, Balochistan University of Information Technology Engineering & Management Sciences, Pakistan [Postal Address: House # 6-5/5 Sheikhan Street Toghi Road, Quetta, Balochistan, 87200, Pakistan] Email: bilal.buitems@yahoo.com 2 Associate Professor, Department of Management Sciences, Faculty of Management Sciences Balochistan University of Information Technology Engineering & Management Sciences, Pakistan. Email: noor.muhammad@buitms.edu.pk 3 Assistant Professor, Department of Management Sciences, Faculty of Management Sciences Balochistan University of Information Technology Engineering & Management Sciences, Pakistan. Email: nadeem.zaman@buitms.edu.pk © Copyright: The Author(s) This is an Open Access article distributed under the terms of the Creative Commons Attribution Non-Commercial License (http://Creativecommons.org/licenses/by-nc/4.0/) which permits unrestricted noncommercial use, distribution, and reproduction in any medium, provided the original work is properly cited. Diversifcation, Industry Concentration, and Bank Margins: Empirical Evidence from an Emerging South Asian Economy Bilal SARWAR 1 , Noor MUHAMMAD 2 , Nadeem Uz ZAMAN 3 Received: May 09, 2020 Revised: May 24, 2020 Accepted: June 07, 2020 Abstract The study aims to empirically examine the determinants of bank margins from Pakistan, an emerging South Asian economy. To elucidate the importance of the Pakistani banking sector, secondary data has been used, which was extracted from the annual accounts of twenty- four Pakistani scheduled commercial banks (20 conventional, four full-fedged Islamic) over a sample period of 2006 to 2017. The factors identifed in the dealership model and the subsequent empirical developments in the dealership model categorized as bank-specifc, diversifcation, regulatory, and industry concentration are analyzed by applying the most-common linear dynamic panel-data estimator, the Generalized Method of Moments (GMM) estimator, developed by Arellano and Bond (1991). The fndings reveal that, among the bank-specifc variables, funding cost, credit risk, managerial efciency, market share, and operating cost are signifcant predictors of bank margins. For diversifcation variables employed in the study, both variables including net non-interest income and asset diversity are as well signifcant predictors of bank margins. It is also found that the market concentration variable proxied by the Herfndahl-Hirschman Index (HHI) is signifcantly predicting bank margins. Subsequently, one of the regulatory variables, the opportunity cost of holding reserves, and one bank-specifc variable, the degree of risk aversion, are insignifcant in the model. Keywords: Dealership Model, Diversifcation, Generalized Method of Moments, Scheduled Commercial Banks, Pakistan JEL Classifcation Code: C33, C51, G21 1. Introduction In conventional financial systems, commercial institutions, like banks provide financial intermediation in an economic system by directing financial assets from excessive economic sectors to trade and industrial sectors that are experiencing scarcity. Through this, they accelerate capital formation and savings in the economic system. The banking sector is considered to have a major portion of the share in the overall financial sector of economies of the world, including banks, insurance companies, and other financial institutions. The Pakistani banking industry possesses some unique characteristics due to a dual banking system in place. This is due to the presence of traditional conventional banks working side-by-side with pure Islamic banks with the inception of Meezan Bank Limited since 2002. Due to intense rivalry in the banking industry and regulatory requirements laid out by the State Bank of Pakistan (SBP), several conventional banks are operating with Islamic banking windows to battle for a greater market share to exercise more market power enabling them to earn greater net income. Net Interest Margin (NIM) is usually termed to be a key indicator of the bank’s level of efficiency in terms of their fundamental role of financial intermediation. Due to the dual