Working Paper 245 - Sectoral credit concentration and bank performance in Zambia

Anthony M. Simpasa (a.simpasa@afdb.org) and Laureline Pla (l.pla@afdb.org)
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Anthony M. Simpasa: African Development Bank, Postal: 15 Avenue du Ghana P.O.Box 323-1002 Tunis-Belvedère, Tunisia, https://www.afdb.org/en/knowledge/publications
Laureline Pla: African Development Bank, Postal: 15 Avenue du Ghana P.O.Box 323-1002 Tunis-Belvedère, Tunisia, https://www.afdb.org/en/knowledge/publications

Working Paper Series from African Development Bank

Abstract: Banks’ choice regarding credit portfolio composition is a rational strategy to manage risk and enhance performance. Thus, sectoral credit concentration has implications on the banks’ risk taking behaviour and profitability. This paper assesses the effect of credit concentration and risk in Zambia, using bank-level data. Zambia’s financial sector reforms have been widely acclaimed, but there are visible contradictions between expectations of these reforms and actual outcome in terms of the banks’ conduct. We characterize the evolution of sectoral credit concentration and risk conditioned on bank size clusters. Our analysis shows that small banks have a less diversified credit portfolio than medium and large sized counterparts. We also note that banks’ credit concentration is inversely related to risk, a result which appears at variance with theoretical expectations. We argue that by concentrating lending to few sectors, banks are able to reduce costs of monitoring and hence risk, which in turn improves overall profitability. From a policy perspective, the regulatory authorities should explore alternative measures to mitigate risk, rather than restricting exposure to given sectors, which have a minimal concentration-risk impact.

Date: 2017-01-16
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