Examining the Impact of Loan Diversification Policy on the Operational Efficiency of Bank of Kigali and Ecobank Rwanda

1David Nyambane and 2Agaba Richard Mbonyi

1Faculty of Business and Management, Kampala International University, Western Campus, Uganda.

2Faculty of Business Administration (Finance and Accounting Option) of Mount Kenya University Kenya.


To mitigate overall loan portfolio risk, commercial banks often turn to diversification strategies. However, the impact of such diversification remains contested among scholars. This study delved into the analysis of the Loan Diversification Policy’s influence on the efficiency of Bank of Kigali and Ecobank Rwanda. Employing a mixed-methods approach—both qualitative and quantitative—the study encompassed 191 employees, with a sample size of 66 managers. Data collection utilized questionnaires and annual reports from the banks. Cronbach’s Alpha measured internal tool consistency, yielding a coefficient of 0.861. Analysis involved descriptive and correlational statistics, executed through Statistical Package for Social Sciences (SPSS), with findings presented via charts and tables. Regarding the first objective, among 66 respondents, reasons for risk in the loan portfolio varied: competition among banks (15.2%), global financial crisis (13.6%), currency fluctuation (9.1%), high lending rates (15.2%), loan recovery issues (13.6%), new regulations (12.1%), government policies (9.1%), and declining interest margins (12.1%). Concerning the second objective, factors influencing bank efficiency included education levels (16.7%), experience (22.7%), participation in education programs (19.7%), professional organization memberships (18.2%), training methods (21.2%), and supervision quality (1.5%). Regarding the third objective, the study revealed a significant correlation (99.3%) between the loan diversification policy and commercial bank efficiency, indicating a strong positive relationship.

Keywords: Commercial banks, Loan portfolio, Diversification policy, High correlation, Management of banking institutions.


Generally, banks had made influential reforms after the 2001 World financial crisis. Following the crises in 2001 and the restructuring process, the banking sector showed a rapid growth performance in the 2002-2008 period. The total assets rose from USD 130 billion to USD 465 billion, and their ratio to GDP from 57 per cent to 77 per cent. The number of branches and staff rapidly increased [1]. According to [2], Italian bank’s diversification reduces bank returns while producing riskier loans. However, they confirmed that German banks diversification tends to be associated with reductions in bank returns, even after controlling for risk. According to [3], German banks increased loan portfolio diversification so that their efficiency was good. [4] discussed how large banks in Sweden manage their loan portfolios and postulated the policies behind loan portfolio diversification at banks are useful in the efficiency of the banks. The efficient and effective performance of the banking industry over time in Nigeria is an index of financial stability. The extent to which Nigerian banks extend loans to the public for productive activities accelerates the pace of a nation’s economic growth and its long-term sustainability [5]. The loan diversification policy of commercial banks enhances the ability of investors to exploit desired profitable ventures. Loan creation is the main income-generating activity of banks [6]. However, it exposes the banks to loans. Among other risks faced by banks, loan plays an important role in banks’ profitability since a large chunk of banks’ revenue accrues from loans from which interest is derived. However, interest rate risk is directly linked to loans implying that a high increment in interest rate increases the chances of loan default. According to [7], the most ranked factor contributing to non-performing loans in Africa is the allocation of funds by borrowers to businesses. The second significant factor was weak loan portfolio management especially weak credit analysis at the application stage followed by a lack of integrity of borrowers. Change in country policies, court injunction instituted when bank intends to dispose of properties, low prices fetched when disposing of mortgaged assets and business failure. [8], described loan diversification policy and management as the process that commercial banks put in place to control their financial exposures. He further stated; the process of risk management comprises the fundamental steps of risk identification, risk analysis and assessment, risk audit monitoring, and risk treatment or control. Various loan diversification policy lapses arose from the risk management orientations in Kenya since the era when commercial banks were owned by foreigners. The post-Genocide Rwanda’s financial sector has changed drastically, and banks’ soundness and performance have considerably improved since 2005. Yet, the collective performance of the banking sector in helping the country to achieve its economic growth objectives remains an unexamined aspect because of the high level of NPLs [9]. Commercial Bankers in Rwanda agreed that 2013 was not particularly a very good year for the banking industry. First, the ratio of non-performing loans suddenly shot-up to worrying levels of 7% – the highest in about five years and way above the central bank’s benchmark of 5%. Secondly, to stem the tide of rising bad loans, commercial banks adopted a more cautious approach scaling back on new loan approvals, especially in the first half of the year. This resulted in low growth of lending to the private sector. And since lending is the core business of banks, profitability was bound to suffer as the industry managed a miserly 12.9 per cent growth in net income down from 27.8 per cent in the 2013 year [10]. Yet despite a generally bad year, Bank of Kigali, the country’s biggest lender, managed to post an impressive balance sheet that will see shareholders pocket Rwf 7.4 billion in dividends. This is half of the net income of Rwf .8 billion that the bank made during the year, increasing by Rwf3 billion from the previous year. By June 2012, there were already signs that BK shareholders would still reap from their investment despite challenges when the bank net loans fell by 1.5% during the second quarter of the year compared to the same period the previous year, but the bank went ahead to post net half year profit of Frw7.3 billion [11].

To minimize the total loan portfolio risk, commercial banks need to consider diversifying their corporate loan portfolio. Yet, research indicates that the effect of such diversification has conflicting findings by various scholars. According to [12], bank failure is a problem in many countries. Establishing an understanding of and finding a solution to the problem has been the focus of a great deal of research. The years, 2007-2013, marked a new wave of bank failure in the U.S., one characterized by high unpredictability and serious consequences. Within this period, over 450 U.S. banks failed. Before this, many other such episodes have ensued, especially in the 1970s, 1980s and no less so, in the 1990s. The overall result was a series of bank failures ranging from 262 failures in 1987, 534 in 1989 and over 4000 bank failures between 1979 and 1994. According to [12] loan marketing strategies, portfolio diversification, interest rate risk, and capitalization management strategies affect the efficiency of commercial banks. Therefore, the above background shows that lending has been, and still is, the backbone of the banking business in Rwanda and other countries. Hence, as firms in Rwanda are complaining about lack of access to loan, while banks on the other hand have suffered large losses on bad loans [13], the researcher was motivated to carry out this study.


Industrial loan diversification increases bank return while endogenously producing riskier loans for all banks in our sample; this effect is most powerful for high-risk banks. Sect oral loan diversification produces an inefficient risk-return trade-off only for high-risk banks. An important component of a strong risk management system is a bank’s ability to assess the potential losses on its investments. One factor that determines the extent of losses is the recovery rate on loans and bonds that are in default. The recovery rate measures the extent to which the creditor recovers the principal and accrued interest due on a defaulted debt. One reason why recovery and default rates may be inversely related is that they are both likely to be strongly influenced by the economy. In financial institutions, efficiency implies improved profitability, a greater amount of funds channelled in, better prices and service quality for consumers and greater safety in terms of improved capital buffer in absorbing risk. Bank efficiency becomes critically important in an environment of increasingly contestable international markets whereby information regarding the efficiency of banks in a particular country as compared with their counterparts in other countries is important as it enables policymakers to make better decisions regarding the direction of the industry. The level of efficiency of commercial bank operation is very important to the economy and commercial banks themselves to compete with others. About the comparison study findings, the determinants of long-term loan policy and short-term loan policy in Ecobank and BK contribute positively to their efficiency. First, the selected banks themselves can focus on the sources of efficiency in their future loan planning policy. Second, it may also strengthen their armoury that can be used against adverse situations like financial crisis accounts that are being gradually liberalized. Financial sector reforms mainly focus on the banking sector and improvement in bank efficiency is a pre-requisite for development. The study also concludes that loan diversification policy leads to the efficiency of selected commercial banks at the rate of 99.3%.


According to the findings of this study, the study recommended that there is no reason to believe that the concentration measures about industrial and regional diversification of the loans or the diversification of bank financing sources suffer from simultaneity concerning the efficiency of banks. A merger between banks with different business lines but with similarities in the regional composition of their portfolios can result in more efficient entities. The management of commercial banks should play a critical role in delivering strategic objectives by championing best practices in loan management and diversification, objectively assessing the adequacy of effective loan portfolios and management of existing factors for effective loan portfolios. Loan officers should intensify efforts on their job, routine checks on customers and prudent approach to recover loans and advances granted to customers.


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CITE AS: David Nyambane and Agaba Richard Mbonyi (2023). Examining the Impact of Loan Diversification Policy on the Operational Efficiency of Bank of Kigali and Ecobank Rwanda. INOSR ARTS AND HUMANITIES 9(2):74-99.