EFFECT OF CREDIT PORTFOLIO CONCENTRATION ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN TANZANIA

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