The impact of loan portfolio diversification on the financial Soundness indicators of banks "An Empirical Study on the Egyptian banking sector"

Research Abstract

Banks have faced difficulties in previous years for several reasons, mainly due to loosening credit standards and poor credit portfolio risk management. Credit facilities are the biggest source of credit risk and risk. They are one of the most important operations of banks, Of the assets of any bank, in addition to causing a major problem for the bank in the event of default, resulting in a shortage of the bank's physical resources (Islam, M., 2014, p.70). This may be due to the banks' omission or disregard of some of the factors and procedures that should be taken into account when making a decision to grant and follow up credit to customers in order to minimize the risks that the Bank may incur in the event of failure to properly assess clients or, Without study and analysis (Alhassan, A., 2015, p. 1319). Loans are the largest source of credit risk for commercial banks. The size and level of credit risk losses are very high compared to other types of risk due to the high level of loan losses that extend until the bank fails. Credit risk represents the largest proportion of risk to banks, 88% of total risk. Total loans represent 33.1% of total assets, 44.5% of total deposits during the period 2014-2016. The ratio of non-performing loans to total loans stood at 5.9% at the end of June 2016. The ratio of loan provisions to non-performing loans was 0.99% , Annual Report 2015-2016, p. In light of the above, the research problem is determined to determine whether the CAMELS model can be applied to assess the financial safety of Egyptian commercial banks and the degree of vulnerability to financial safety resulting from diversification of the loan portfolio as a credit risk reduction policy recommended by the Basel II Committee. Their application, which reduces the credit risk to banks. Are the Egyptian commercial banks diversifying their loan portfolios to reduce credit risk? What is the impact of diversification of the loan portfolio on financial safety indicators? In light of CAMELS model indicators. Based on this, the researcher was able to formulate the research hypotheses as follows: First hypothesis: There is a statistically significant positive correlation between diversification of the loan portfolio as one of the Bank's policies to reduce credit risk and capital adequacy. Second hypothesis: There is a statistically significant positive correlation between portfolio diversification as one of the Bank's policies to reduce credit risk and asset quality. Third hypothesis: There is a statistically significant positive correlation between diversification of the loan portfolio as one of the Bank's policies to reduce credit risk and quality management. Fourth hypothesis: There is a positive relationship between the diversification of the loan portfolio as one of the policies of the bank to reduce the credit risk and the quality of profits. Fifth hypothesis: There is a statistically significant positive correlation between diversification of the loan portfolio as one of the Bank's policies to reduce credit risk and liquidity. Sixth hypothesis: There is a statistically significant positive correlation between diversification of the loan portfolio as one of the Bank's policies to reduce credit risk and sensitivity to market risk. The results of the statistical analysis showed that the diversification of the loan portfolio has a positive impact on the financial safety of the banks. The results of the financial analysis proved that the most diversified banks in its loan portfolio are Credit Agricola Egypt. At the same time, at the same time, the analysis showed that Emirates NBD was the top bank in terms of the degree of concentration of its loan portfolio and at the same time the bank's financial safety (rated 2 on the CAMELS model) has been explained. The results of the analysis also showed that Suez Canal Bank has a high degree of concentration of the loan portfolio and at the same time the bank's financial safety is low (16 on the CAMELS model). Meanwhile, the results of the statistical analysis showed the positive effect of the diversification of the loan portfolio on the financial safety indicators the results showed the following: 1-There is a positive effect of diversification policy on capital adequacy 2-There is a positive effect of diversification policy on loan quality 3- There is a positive effect of the policy of diversification of the loan portfolio on the quality of management. 4- There is a positive effect of the policy of diversification of the loan portfolio on the quality of profits. 5- There is a significant positive effect on the liquidity diversification policy. 6- There is a positive effect of diversification policy on market risk sensitivity

Research Keywords

camels , CRM