Diversification and Stability of African Banks

Abstract

The present study empirically examines whether banks operating within Africa concentrate or diversify their incomes and loan portfolios and how these decisions affect their stability. The present study uses Generalized Methods of Moments (GMM) as the econometric tool in carrying out the analysis. The study shows that banks in Africa are relatively stable and well diversified. However, income diversification strategies do not enhance banks’ stability. Loan portfolio concentration guarantees a reduction in bank credit risk and boosts stability. Overall, loan portfolio concentration is therefore more important for stability than income diversification among banks in Africa.