Risk management, diversification, and profitability of commercial banks in Central Africa

• Published date: 01 April 2022
• Author: Félix Zogning,Serge Didier Lenga
• Date: 01 April 2022
• DOI: http://doi.org/10.1002/jcaf.22544

Received:  December Revised:  January Accepted:  February 

DOI: ./jcaf.

RESEARCH ARTICLE

Risk management, diversification, and profitability of

commercial banks in Central Africa

Félix Zogning1Serge Didier Lenga2

University of Sherbrooke, Sherbrooke,

Canada

University of Brazzaville, Brazzaville,

Republic of the Congo

Correspondence

Félix Zogning, University of Sherbrooke,

Sherbrooke, Canada.

Email: felix.zogning@usherbrooke.ca

Abstract

This article examines the impact of bank risks and diversification on the prof-

itability of commercial banks in Central Africa. The results indicate that the

credit risk and liquidity risk have a negative impact on the profitability of these

banks. Moreover, credit risk is reduced more through credit rationing than

through an in-depth examination of the borrowers’ profile. Lastly, banks use

diversification to compensate for revenues lost because of credit rationing.

KEYWORDS

bank diversification, banking risks, Central Africa, credit risk, liquidity risk, profitability

1 INTRODUCTION

The late s were marked by a double economic and

financial crisis that hit the bank sector of the CEMAC

(Central Africa Economic and Monetary Community,

composed of Cameroon, Central African Republic, Congo,

Gabon, Equatorial Guinea and Chad.) with major cash-

flow problems, management deficit accumulations and a

high level of doubtful and uncollectible debts (–

Banking Commission for Central Africa reports). The dete-

rioration of the terms of the exchange caused by the drop

in commodity prices and export earnings led to a reduction

in deposits, placing banks in a situation of illiquidity that

restricted intermediation activity.

To remedy the situation, CEMAC political bodies had

implemented major structural reforms that mainly focused

on consolidation and compliance with regulations. Con-

solidation aimed to promote mergers and acquisitions,

reduce the number of banks and increase equity. As for

the reinforced regulations, they were meant to prevent

activities with excessive risks and improve the banks’ risk

management with practices that were well-suited and rec-

ognized. The ultimate goal of the CEMAC was suppos-

edly to make sure that each country’s bank system was

efficient.

In a context in which very strict prudential standards

seem to have made banks very cautious and in which polit-

ical risk is most monitored by financial institutions, what

could be the impact of traditional financial risks on the per-

formance of the bank sector?

The purpose of this article is to examine to what extent

exposure to risk, and in turn the quality of bank risk man-

agement, can affect the profitability of commercial banks

in Central Africa.

2LITERATURE REVIEW

The founding work of Modigliani and Miller ()showed

the absence of impact of the capital structure on the value

of a business upon the assumption of perfect financial mar-

kets. On the other hand, market imperfection generates

impacts observed by Black and Scholes (), Jensen and

Meckling (), and Myers and Majluf (). This reason-

ing was extended by Koehnand Santomero () and then

Saadaoui () for banks. Indeed, these two authors admit

that the reconfiguration of a bank’s portfolio is linked to

its level of risk aversion. For the first author, if the bank is

not risk averse, it reacts to the introduction of a new equity

requirement through a proportionate rise in the yield of

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