Risk management, diversification, and profitability of commercial banks in Central Africa

Abstract

This article examines the impact of bank risks and diversification on the profitability of commercial banks in Central Africa. The results indicate that the credit risk and liquidity risk have a negative impact on the profitability of these banks. Moreover, credit risk is reduced more through credit rationing than through an in-depth examination of the borrowers' profile. Lastly, banks use diversification to compensate for revenues lost because of credit rationing.

Credit Management and Profitability of Banks in Zambia

“…Although statistically insignificant, the NPL ratio had a substantial negative effect on bank profitability because a one unit increase in the ratio resulted in a reduction in profitability of 0.069 units. This finding is in line with our expectations as shown in Table 1 above and accords with the findings of several studies carried out around the world (Altunbas, Gambacorta & Marqués-Ibáñez, 2010;Cole & Gunther, 1998;Ebenezer & Omar, 2013;Gizaw, Kebede & Selvaraj, 2015;Morgan & Stiroh, 2001;Zogning & Lenga, 2022) which established a negative significant relationship between non-performing loan ratio and bank profitability.…”

“…This means that a one unit increase in bank size results in a unit increase of 0.019 in bank profitability; therefore, the bigger the bank size the higher its profitability is likely to become. This finding agrees with many similar studies carried out in different jurisdictions which established a positive relationship between bank size and bank profitability (Biswas et al, 2021;Boahene, Dasah, & Agyei, 2012;Zogning & Lenga, 2022). We attributed this discovery to the principles of economies of scale and substantial bargaining power that are typically linked to large-scale operations.…”

“…On a more regional scale, Zogning and Lenga (2022) studied the effect of credit risk management in 52 banks domiciled in six Central African countries namely, Cameroon, Central African Republic, Congo, Gabon, Equatorial Guinea, and Chad. In line with similar findings in other studies of countries in Sub-Saharan Africa, they concluded that credit risk (non-performing loans/total loans) and liquidity risk (liquid assets/total assets) had a negative and positive statistically significant impact on the profitability of banks (measured by ROA and ROE) respectively.…”