The impact of the diversification strategy on loan portfolio’s return and risk in Kuwaiti banks

Abstract

This paper aims to test the impact of customer and geographical diversification on loan portfolio’s
return and risks, using panel data on 5 Kuwaiti listed commercial banks during 2010-2020 period.
TraditionaL HHI index was used to measure diversification as an independent variable. While the
dependent variables were the loan portfolio return, which was measured by the ratio of loan interest
and commission to total loans, and the loan portfolio risks, which were measured by the ratio of
loan loss provisions to total loans. We find that There is a significant and positive effect of
geographical diversification on loan portfolio return, but There is no significant effect of
geographical diversification on loan portfolio risks, The results also shows that there is no
significant effect of customer diversification on loan portfolio return and risks. Furthermore, they
reveals that the effect of diversification on loan portfolio return and risks differs from one bank to
another.