Implications of Diversification on Financial Performance of Financial Institutions in the Central African Economic and Monetary Community (CEMAC)

Abstract

This paper sought to investigate the effect of diversification on the financial performance of financial institutions in the CEMAC region. Data for the study was collected from COBAC National Bureau of Statistics website, BEAC and the World Bank Statistics reports regarding the activities of financial institutions in the region for the period 2000 to 2021. The collated data was run with the aid of STATA software version 13.0. The researcher used regression analysis (PCSE, PanelGLS) to investigate the effect of diversification (liquid asset to cash, non-interest income to total income, inflation, non-bank financial institution and LGDP) on the financial performance of financial institutions in the region. Finally, Driscool-Kraay regression technique was used to investigate the influence of diversification on competition among these financial institutions. The findings from the PCSE regression showed that diversification explained 56.4% (R² = 0.564) of the variation in financial performance. In conclusion, it was revealed by the regression analysis that diversification had a significant effect on the financial performance of financial institutions in the region. The findings suggest that policymakers should carefully consider the implications of incentivizing banks to increase their lending to government and state owned enterprises. While such policies might aim to support national development goals, they can inadvertently lead to detrimental effects on the financial sector’s health. The study recommends that the emphasis on liquidity aligns with regulatory frameworks that mandate certain liquidity ratios, such as those outlined in Basel III. Maintaining higher liquidity positions helps banks meet regulatory requirements and avoid penalties, which can be financially detrimental.