The impact of loan diversification on bank performance : evidence from MENA countries commercial banks

Abstract

Purpose – The purpose of this thesis was to investigate empirically whether sectoral and geographical diversification has an impact on bank performance in the MENA region. Design/methodology/approach – Sprouting from a positivist approach, the study encompassed 35 listed commercial banks from 11 countries in the MENA region during 2009-2015. Multiple regression on a balanced panel was used as the parametrical tool to test the impact of diversification on banks' risk and return in the MENA region. The consolidated sample of banks was divided also into 3 sub-samples to achieve homogeneity. Significant Findings – On the MENA level: a non-linear relationship exists between sectoral concentration/diversification and banks' market returns. Sectoral concentration to a certain limit improves market returns while geographical concentration reduces banks' market risk linearly. On the GCC level: A non-linear relationship exists between geographical concentration/diversification and banks' accounting returns and between sectoral concentration/diversification and banks' market returns. From a return perspective, sectoral concentration to a certain limit improves banks' market returns while geographical concentration to a certain limit improves banks' accounting returns. From a risk perspective, the relationship between sectoral concentration/diversification and market risk is nonlinear. Sectoral diversification to a certain limit reduces market risk. On the Levant level: A non-linear relationship exists between geographical concentration/diversification and banks' accounting risk (NPL). From a return perspective, sectoral concentration improves banks' accounting returns. From a risk perspective, sectoral concentration reduces accounting risk. On the Levant & North Africa level: A non-linear relationship exists between geographical concentration/diversification and banks' accounting risk. Geographical diversification to a certain limit reduces banks accounting risk. Research limitations/implications – The heterogeneity of banks in the MENA region, and the lack of credible data to dissect into more homogenous subsamples due to the political and economic environment in many parts of the region is a major limitation on the statistical power of the research outcomes. Thus, caution should be taken before extrapolating sub-sample results. Managerial/Practical implications – Sectoral concentration/diversification should be implemented strategically in the MENA region banks to maximize market returns because an optimal point exists. Also, overstretching a banks' portfolio geographically increases banks market risk and should be pursued when the expected benefits overcome/justify the potential market risk. Originality/value – Provides MENA bank regulators, investors and managers an optimal point of diversification to guide them when setting their portfolio strategies. It also fills a gap in MENA banks literature.