Diversification effects on profitability of commercial banks in Tanzania

Diversification effects on profitability of commercial banks in Tanzania Erasto Sonelo MBA (Masters of Business Administration) University of Dar es Salaam, Business school,2020 Hus study analyzes (lie effects of diversification on profitability of commercial banks in Tanzania. The study has been motivated by the ongoing debate on the banking industry; whether to diversify or focus it. In addition the Markowitz Portfolio theory which provides the benefits of diversification towards maximization of return or minimization of risks, which arose the need to analyze diversification effects on profitability when it comes to the context of Tanzania commercial banks. The specific objectives of the study were to analyze the effects of assets diversification and effects of geographical diversification on profitability of commercial bank. The study covers commercial banks operating in Tanzania using unbalanced panel data with a sample of 17 commercial banks with 80 observations which cover bctween2013 to 2018. Two hypotheses were developed and Random effect estimator panel regression analysis with robust standard errors was used to test hypotheses. The study uses number of branches as a measure of geographical diversification and Hirschman Herfindah Index as a measure of assets diversification as predictor variables with Bank size measured by Logarithm of Total assets of the bank as a control variable. The outcome variable which is bank profitability was measured by ROA and ROE. Results show that there is negative significant relationship between geographical diversification and profitability of commercial bank (ROE), and there is positive but not significant relationship between assets diversification (HHI) and profitability of commercial bank (ROA and ROE). The findings from this study contribute to the theory by showing its exception on its application especially in the Tanzanian banking context (Geographical diversification). It also adds to the body of knowledge and usefulness to the managers when making strategic decisions regarding the geographical expansion or assets portfolio creation as a means of improving profitability.