Abstract:
The main purpose of this research is to examine the effect of credit portfolio concentration
on the financial performance of commercial banks in Tanzania, specifically focusing on
NMB Bank PLC in the Western Zone. This study aims to investigate the effect of credit
concentration, including agricultural loans, SME credit, and mortgage loans on bank's
financial performance. The study is grounded in portfolio theory, which emphasizes the
importance of diversification and optimization in portfolio management to balance risks
and returns. To achieve the stated objectives, a quantitative approach and time series
design were employed, utilizing annual data obtained from NMB Bank's financial
statements covering the period from 2009 to 2024. The data was analyzed using
descriptive statistics, correlation analysis, unit root tests, and co-integration tests before
applying a Vector Error Correction model (VECM) for estimation using STATA software.
Based on the data analysis, the results found that agricultural loan concentration and
mortgage loans have positive effects on financial performance as they show an increment
in loan repayment rates over the study period. In contrast, SME loan concentration
demonstrates a negative effect on loan repayment rates. Despite covering a larger portion
of the loan portfolio, SME loans require the bank to strengthen strategies and lending
policies to stabilize financial performance. The results provide insights into the
relationships between credit portfolio concentration and financial performance, revealing
how different types of loan concentrations influence the bank's overall financial health,
which can guide the allocation of funds and loan portfolio management strategies
