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Impact of Asset Diversification on the Profitability of Commercial Banks in Tanzania: A Case of Large Banks in Tanzania

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  • Baraka Lameck

  • Dr. Allen E. Mrindoko

Abstract

Purpose: The study was conducted to examine the Impact of asset diversification on the profitability of selected large commercial banks in Tanzania. Specifically the study intended to examine the customer loans impact on the profitability of commercial banks in Tanzania, examine the bank assurance impact on the profitability of commercial banks in Tanzania and examine investment in Government securities' impact on the profitability of commercial banks in Tanzania. Methodology: This study uses secondary data sources, mainly from annual reports of listed banks, financial reports in newspapers, and data from the Bank of Tanzania regarding the performance of the banking industry. The variables that were used include bank loan, bank assurance, inflation GDP and government. Data was analyzed using descriptive research design whereby Statistical Package for Social Science (SPSS) was used. Findings: The study revealed that customers loan (p=.0418), investments in government securities (p= .0399), and Bank assurance (p=.0348) were significant in predicting the financial performance of commercial banks since all the p values were less than 0.05. Control variables were able to explain the results, Core capital to RWA (p=.0318), asset size (p=.0255), Liquid assets to total assets (p=.0203), Inflation rate (p=.0219), and GDP growth (p=.0273) significant as they were below 0.05. The study conclude that Asset diversifications have a significant relationship with the performance of commercial banks. Unique Contribution to Theory, Practice and Policy: The study used portfolio Diversification theory. The study period, spanning from 2015 to 2020, witnessed a notable positive impact of bank assurance, customer loans and investment in Government securities on the performance of commercial banks. The demand for this asset type highly during this period, creating an active market that contributed to enhanced returns. The study recommended the need for collaboration by all stakeholders in the financial sector to review the regulations and establish a framework that supports the implementation of new asset development.

Suggested Citation

  • Baraka Lameck & Dr. Allen E. Mrindoko, 2023. "Impact of Asset Diversification on the Profitability of Commercial Banks in Tanzania: A Case of Large Banks in Tanzania," International Journal of Finance and Accounting, IPRJB, vol. 8(2), pages 85-100.
    • Handle: RePEc:bdu:ojijfa:v:8:y:2023:i:2:p:85-100:id:2128
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    References listed on IDEAS

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    1. Faisal Abbas & Shoaib Ali, 2022. "Dynamics of diversification and banks' risk‐taking and stability: Empirical analysis of commercial banks," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(4), pages 1000-1014, June.
    2. José Carlos Teixeira & Carlos Vieira & Paulo Ferreira, 2021. "The Effects of Government Bonds on Liquidity Risk and Bank Profitability in Cape Verde," IJFS, MDPI, vol. 9(1), pages 1-23, January.
    3. Shoaib Nisar & Ke Peng & Susheng Wang & Badar Nadeem Ashraf, 2018. "The Impact of Revenue Diversification on Bank Profitability and Stability: Empirical Evidence from South Asian Countries," IJFS, MDPI, vol. 6(2), pages 1-25, April.
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