Impact of Asset Diversification on the Profitability of Commercial Banks in Tanzania: A Case of Large Banks in Tanzania

Abstract

Purpose: The study was conducted to examine the Impact of asset diversification on the profitability of selected large commercial banks in Tanzania. Specifically the study intended to examine the customer loans impact on the profitability of commercial banks in Tanzania, examine the bank assurance impact on the profitability of commercial banks in Tanzania and examine investment in Government securities' impact on the profitability of commercial banks in Tanzania.
 Methodology: This study uses secondary data sources, mainly from annual reports of listed banks, financial reports in newspapers, and data from the Bank of Tanzania regarding the performance of the banking industry. The variables that were used include bank loan, bank assurance, inflation GDP and government. Data was analyzed using descriptive research design whereby Statistical Package for Social Science (SPSS) was used.
 Findings: The study revealed that customers loan (p=.0418), investments in government securities (p= .0399), and Bank assurance (p=.0348) were significant in predicting the financial performance of commercial banks since all the p values were less than 0.05. Control variables were able to explain the results, Core capital to RWA (p=.0318), asset size (p=.0255), Liquid assets to total assets (p=.0203), Inflation rate (p=.0219), and GDP growth (p=.0273) significant as they were below 0.05. The study conclude that Asset diversifications have a significant relationship with the performance of commercial banks. 
 Unique Contribution to Theory, Practice and Policy: The study used portfolio Diversification theory. The study period, spanning from 2015 to 2020, witnessed a notable positive impact of bank assurance, customer loans and investment in Government securities on the performance of commercial banks. The demand for this asset type highly during this period, creating an active market that contributed to enhanced returns. The study recommended the need for collaboration by all stakeholders in the financial sector to review the regulations and establish a framework that supports the implementation of new asset development.