Impact of Concentration and Diversity of Loan Portfolio on The Bank Equity Return: A Cross Country Analysis

Abstract

This study aims to determine the impact of the concentration and diversification of the loan portfolio in the returns of shares of a sample of Iraqi and Jordanian banks over the years (2006-2019).   The problem of studying is that it is better to focus or diversify into the loan portfolio. The extent to which the focus and diversification of the loan portfolio affect the returns of shares of the research sample banks. In addition to identifying the statistical relationship between them. The results show that the research sample banks vary among themselves regarding the degree of concentration and diversification in their loan portfolios on different economic sectors. Besides, Iraqi banks are directing the study sample towards a high focus on the commercial sector. Jordan's banks tend to adopt a sometimes full and somewhat moderate credit policy at the other time. The loan portfolio concentration on the banks' samples' specific economic sectors also significantly impacts stock returns. The research provides recommendations to achieve the best balance informing the loan portfolio to achieve the highest returns with the lowest possible risk. We also recommend that banks sample research the need to follow a moderate strategy (concentration and diversification) in their loan portfolios to achieve the best return against reasonable risks.  The management of banks must follow the instructions and directives issued by the regulators and adhere to the Basel III committee's requirements for reducing significant risks to banks and affecting their financial position and researching a sample of banks to determine their internal and external environments' strengths and weaknesses to enable them to build their credit portfolios as required and achieve stable and continuous returns.