How Important Diversification in Financial Industry Is? - Research Paper

Introduction

Diversification is an aspect in every organization that seeks to maximize profits. The banking institutions are keen to ensure that they achieve the maximum profits based on the resources that they control. Diversification is one of the important success strategies that financial institutions seek to pursue. The design of a banking structure is also meant to reduce the risks as well as the costs of a financial institution so that the profits of the organization are maximized.

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The Practice of Reducing Risk Through Diversification

Diversification in financial institutions helps in reducing the probability that a given financial institution will fail to generate profits hence exit the market. This is why the structure of the banks is such that they offer various products that target different classes of customers. Some banks engage in corporate banking, private banking, as well as personal banking, and these products, target companies, individuals in various income classes as well as people who hold different religious beliefs. Other products that the banks may offer include funds transfer as well as insurance covers.

Highest Profits Diversification

Another reason for diversification is to achieve greater profits for the financial institution. The more products the banks have, the greater the customer base they attract, and this means more profits to the companies. Diversification also involves presence in various countries through subsidiaries as well as branches. The more branches an organization has, the more revenues are generated by such financial institutions.

Role of Customer Needs in Banking Industry

The banking structure is also designed in a way that the customers benefit in a great way. The various products the banks offer benefit the customers in that they have the option of choosing the products that they need. The financial institutions also benefit by being more competitive in the industry hence have a better future as compared to other firms. In the global market, financial institutions depend on the ability to invent products that best meet customer needs.

It should be realized that having banking structures that are very diversified may pose a challenge to financial institutions and the rest of the world. It may be a source of failure for the firms if the products and activities are risky meaning that there is a chance that money is lost and never recovered.

Conclusion

From the analysis, diversification is an important factor in the financial market. However, excessive diversification can lead to the failure of the banks if the banks reach a point where they cannot manage their innovations. Additionally, the diversification activities may make it difficult for the relevant authorities to control the financial institutions. This can result in problems such as financial crises that can affect various parts of the world. As such, financial institutions should manage their diversification strategies well to ensure that they meet the customer desires without increasing the risks that they face in their operations. The banks cannot avoid risks by not engaging in diversification because this would lead to loss of customers hence failure of the firms. The success strategy should be accompanied by strong leadership and management skills to ensure that risks are eliminated, and the profits that the banks make are maximized.