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

Abstract

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