The Impact of Loan Portfolio Management on Credit Risk: Evidence from Banking Sector of Afghanistan

Abstract

This article empirically examined the effects of loan portfolio diversification on commercial banks' credit risk in Afghanistan from 2007 to 2019. In this paper, the annualized data is used to run the regression model, and the least-squares method was followed; meanwhile, the Hirschman-Herfindahl index is used as a diversification index. Eventually, the estimation results in compliance with the traditional theory of portfolio management represent that loan portfolio diversification has a negative-significant impact on credit risk, while the capital adequacy ratio coefficient according to the moral hazard hypothesis indicates that the amount of non-performing loans decreases when the proportion of the shareholders' capital in the total capital of the bank's increases. Therefore, commercial banks have to promote their portfolio diversification and increase the proportion of shareholders' capital in the banks` financing resources to efficiently manage their credit portfolio and reduce the credit risks associated with their loan portfolios.