Impact of Diversification on Bank Performance: Empirical Evidence from Ethiopian Private Commercial Banks
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Date
2024-06-02
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
A.A.U
Abstract
The objective of this study was to examine the impact of income and loan portfolio diversification
on bank performance among private commercial banks in Ethiopia. For attaining this research
objective, the study followed a quantitative research approach and an explanatory research
design. Thus, data was collected for both independent and dependent variables: measures of bank
income and loan portfolio diversification, and measures of bank performance from 16 private
commercial banks for the study period 2017 to 2022. The study used econometric models to
examine the impact of income and loan portfolio diversification on banks’ performance. The study
found that income diversification into interest and non-interest income sources positively impacts
profitability and reduces bank risk. The overall impact of income diversification on bank
performance was found to be positive and statistically significant. The study also found that noninterest
income
diversification
into
fees
and
commissions
income
and
other
non-interest
income
sources
has
a
negative
impact
on
profitability
and
increases
bank
risk.
The
overall
impact
of
noninterest
income diversification on bank performance was found to be negative and statistically
significant. With respect to loan portfolio diversification, the study found that naïve loan portfolio
diversification was found to have a negative impact on profitability and bank risk. Similarly, loan
portfolio diversification against the loan market benchmark portfolio was also found to have a
negative impact on both profitability and bank risk. The overall impact of naïve loan portfolio
diversification and loan portfolio diversification against the market benchmark portfolio on bank
performance was found to be indeterminate without deciding what is considered an efficient tradeoff
between
profitability
and
credit
risk.