The study examines the influence of portfolio diversification on financial performance: evidence from listed

Banks on the Ghana Stock Exchange. The results of this study indicate that the combined impact of the deposit

portfolio, the loan portfolio, and the investment portfolio on the financial performance of the banks quoted on

the Ghana Stock Exchange is statistically insignificant. Used a descriptive correlational research design and

analyzed secondary data of financial statements published during eleven years (2012-2021) through solid

statistical methods, including fixed effects and random effects models, together with the Hausman test, which

underlines the reliability of these results.

performance.

Keywords: Portfolio diversification, financial performance, returns on assets, returns on equity

The banking industry is crucial to the growth of every economy worldwide. Adegboye, Ojeka, and Adegboye

(2020) claim that financial institutions have a significant impact on the stability of any economy. The movement

of money between banks, depositors, and borrowers depends on the bank acting as a middleman, according to

Yuksel, Dincer, and Karakus (2020). Since it determines the next stage of an economy's growth, the sector's

stability is essential. Adegboye, Ojeka, and Adegboye (2020) claim that financial institutions have a significant

impact on the stability of any economy. By receiving deposits and disbursing them as loans to organizations and

This study examined the relationship between a bank's deposit holdings and its performance. Performance

measurements can be discovered with quantitative or qualitative performance attributes or definitions. They

provide an organization with a tool to oversee the development toward predetermined goals by outlining key

indicators of organizational performance and customer satisfaction. The effectiveness of organizational efforts

in achieving organizational goals can be evaluated through performance measurement. The outcomes, successes,

and end products of an organization's efforts were defined as performance by Guest et al. (2003). Bank loans are

described as agreements between financial organizations that lend money and various types of legal entities that

borrow it with the anticipation of a future principal and interest repayment by Monokroussos and Gortsos (2020).

Despite offering a wide range of services, commercial banks get the majority of their revenue and profits from

lending. However, using them comes with a lot of risk. Providing credit to consumers is currently the banking

employing them involves considerable risk. The primary source of income for the banking system at present is

the granting of credit to consumers, which exposes them to high credit risk and results in a sizable portion of

their income being lost (Ozili, 2018). Finance managers make key financial decisions regarding investments,

financing, and dividend distributions. Forgoing current expenses in favour of future consumption is a key

requirement for investing to maximize wealth (Lamichhane, 2021). The primary responsibility of investment

firms, which act as financial intermediaries, is to invest the money that various clients have pooled into financial

instruments known as portfolios (Chepkorir, 2019). These companies transact on the financial market in bonds,

stocks, money, property, and other assets to generate a profit for their investors.

Choosing which financial securities to invest in has a significant impact on the performance of investment

enterprises (Kimeu, 2015). High-return investments not only guarantee the survival of these companies but also

achieve relative to the equity value of the company. Return on assets is considered a reliable measure for

assessing how effectively managers utilize assets to generate income. This current study employed return on

assets and return on equity to establish the efficiency level of banks based on their deposits, loans, and investment

portfolios. Studies conducted by Obiero (2018), Philita (2018), Chepkorir (2018), and Mutega (2016) to gauge

performance in their studies

In their study on the factors affecting Kenyan commercial banks' financial performance, Ongore and Kusa (2021)

found a wide range of factors that affect financial performance. These many variables include asset quality,

managerial effectiveness, capital sufficiency, liquidity management, and other macroeconomic factors.

The Bank of Ghana (2022) recognised that lending may be the most significant banking activity because interest

on loans is the primary source of income and cash flow for any commercial bank, which helps to maintain

predicament necessitates the development of a successful strategy to address the bank's unsustainable long-term

financial performance, which is partially dependent on the loan portfolio held. The goal of this research is to

investigate the impact of loan portfolio management on the effectiveness of Ghanaian banks.

Numerous academics and researchers worldwide have focused on the impact of portfolio diversity on the

financial performance of banks. For instance, Barnes and Burnie (2014) looked at the impact of bond portfolio

composition and the ideal risk-return relationship on the performance of diversified industries listed on the

Canadian Stock Exchange. Chepkorir (2018) evaluated the impact of portfolio diversification on the financial

performance of commercial banks listed on the Nairobi Securities Exchange. Doaei (2014) conducted a study

focusing on Bursa Malaysia's financial performance and diversity. Additionally, Hailu and Tassew (2018)

focused on the effect of investment diversification on the financial performance of commercial banks in Ethiopia.

the Ghana Stock Exchange, which is the ultimate objective of this current study. Therefore, the study aims to

investigate how portfolio diversity affects the financial performance of particular listed banks on the Ghana

Stock Exchange. The following research hypotheses were developed in accordance with the study's objective:

The study tested three null hypotheses to assess the relationship between various financial portfolios and the

financial performance of selected listed banks on the Ghana Stock Exchange. The first hypothesis (H₀₁) posited

that the deposit portfolio has no significant effect on the financial performance of these banks. The second

third hypothesis (H₀₃) asserted that investment portfolios have no significant effect on the financial performance

of the selected listed banks on the Ghana Stock Exchange.

The Modern Portfolio Theory (MPT), developed by Markowitz in 1952, provides a solid theoretical framework

for evaluating portfolio diversification strategies. The theory is especially pertinent for investment firms looking

To determine whether diversification enhances financial performance and reduces exposure to unsystematic risk,

this study employs the MPT to analyze how listed banks on the Ghana Stock Exchange diversify their portfolios

across asset classes and industries. MPT remains essential in investment decision-making, even in the face of

critiques about rationality assumptions and market irregularities (Mandelbrot, 1963; Fama & French, 1992). For

businesses seeking the best diversification strategies, ideas of the efficient frontier, risk quantification, and asset

correlation offer an organized method. As a result, this study examines how portfolio diversification affects

listed banks' financial performance on the Ghana Stock Exchange using MPT as a guiding framework.

The performance of manufacturing and investment enterprises was examined by Jabbarzadeh, Motavassel, and

Mamsalehi (2014) using publicly traded shares on the Tehran Stock Exchange. Secondary data from 14

unbalanced panel data model. The findings showed that portfolio diversity and a company's financial stability

are causally related. The size of the bank had an impact on the relationship between portfolio diversity and

financial performance, the study also showed.

capital structure, liquidity, and financial performance had little bearing on firm outcomes in the context of

diversification came from weak correlations between these variables. Nevertheless, this study did not specifically

address NSE-listed companies and did not consider asset class diversification.

The Herfindahl-Hirschman Index (HHI), firm size as determined by total assets, and liquidity as determined by

the current ratio were among the indicators used by Osewe (2020) to investigate portfolio diversification among

investment firms listed on the Nairobi Securities Exchange (NSE). Targeting each of the five investment firms

listed on the NSE, a descriptive research design was chosen. Multiple regression analysis results showed that

diversification had a significant impact on financial performance as determined by ROA. These findings

underscore the importance of diversification tactics in enhancing the performance of investment firms in Kenya.

Although insightful, the study did not examine the risk management component of diversification, which is

something this study attempts to address.

Ndungu and Muturi (2019) investigated how the financial performance of Kenyan commercial banks was

affected by product, geographic, and income diversification. Data from 2013 to 2017 showed that while product

banking industry, not the NSE, was the study's primary focus.

employed a descriptive survey design and examined secondary data from 45 companies, found that stocks

comprised the most significant and lucrative portion of the portfolio, with bonds and money market investments

Ghanaian banks. These findings underscore the challenges of managing loan portfolios and emphasize the need

for banks to develop targeted strategies tailored to specific market conditions.

2010 to 2017, stocks were chosen for the portfolio. After optimisation, it was discovered that the portfolio had

an annual yield of 29.6% and a relatively high risk of 23.4%. Although portfolio risk is the study's primary focus,

it also includes highlights on portfolio optimisation.

metrics for Ghanaian banks, including return on equity (ROE) and return on assets (ROA). However, there is

Portfolio diversification is a crucial financial strategy for reducing risk and enhancing returns. However, there

has been little empirical research on the precise effects of this strategy on the financial performance of banks

listed on the Ghana Stock Exchange. Most recent studies usually extrapolate findings from other industries or

markets, which may not adequately represent Ghana's unique economic and regulatory environment. By

exploiting this gap, researchers can examine the effects of varying degrees of diversification within bank

portfolios on their overall stability, profitability, and financial performance. Understanding both the "what" and

the "how" of diversification in Ghanaian banks is a significant research gap. How, for example, do these banks

find sources of income that meet the needs of the regional market? What obstacles do they encounter when

putting these strategies into practice, particularly when the economy is struggling? Examining these issues could

provide insightful information for bank management plans aimed at maximizing asset allocation and improving

that establishes the nature of the universe and the place of individuals within it. Philosophy is a fundamental

perspective that scientists often adopt in their search for meaning. The paradigm positivist school of thought was

used to frame the investigation. This school of thought emphasizes objectivity, which requires that researchers

be impartial, independent of their own values, and unbiased in the research they conduct (Creswell, 2004). To

investigate the impact of portfolio diversity on the financial performance of a select group of listed banks on the

Ghana Stock Exchange, the study employed a quantitative paradigm. This idea served as the foundation of the

study because observation and measurement are at the heart of science. The study employed a logical approach,

as it was based on examining widely held beliefs (Saunders & Thornhill, 2009).

A research design is a plan that lays out the specifics of how a study was done (Sekaran & Bougie, 2013; Kothari,

2011; Cooper & Schindler, 2014). Further, a research design is defined by Saunders, Lewis, and Thornhill (2014)

a specific time point and examining it for associations (Saunders et al., 2014; Mulwa, 2013). The quantitative

data were also analyzed to assess the current state of the selected banks, including their deposit, loan, and

investment portfolios, as well as their impact on return on assets and return on equity.

The study primarily focuses on all the listed banks on the Ghana Stock Exchange. However, four of the listed

banks were selected and investigated. These are Access Bank Ghana Limited, the Agricultural Development

researcher can admissibly apply the results found in the findings. At the time of this study, there were 11 listed

banks on the Ghana Stock Exchange (Ghana Stock Exchange, 2023), which formed the study population.

It is essential for a researcher to identify the characteristics of the population and ensure that these are accurately

replicated in the chosen sample when sampling. The sample size from all listed banks on the Ghana Stock

Exchange was determined through the purposive sampling technique.

return on assets and return on equity for the aforementioned years.

The statistical tool, such as STATA 14, is used to check, code, and run the raw data to provide descriptive

statistics, inferential statistics, and regression coefficients, which determine the effect of portfolio diversification

on the financial performance of selected banks listed on the Ghana Stock Exchange. It used fixed effects and

random effects, as well as the Hausman test. In addition, the F-test was used to test the fitness of the regression

analysis model before the model's coefficients were analysed and understood.

The section presents data analysis and discussion of findings using various approaches and methods described

in methodology.

for Deposits spans from 0.461 to 0.812. Loans have an average value of around 0.409, with a slightly higher

standard deviation of 0.139. The minimum value for Loans is 0.156, while the maximum is 0.735. Investments

have an average value of approximately 0.219, with a standard deviation of 0.142. The range of values for

Investments starts from 0 and goes up to 0.530. The Return on Assets variable shows an average value of 0.029,

indicating a moderate level of profitability for the banks. The standard deviation of 0.020 suggests some

variability in the performance of banks in terms of their return on assets. The range of values for Return on

Assets extends from -0.037 to 0.059.

The analysis focuses on examining the impact of banks' portfolio diversification on their performance,

specifically in relation to the dependent variable, Return on Assets (ROA), using independent variables such as

Deposits (Dep), Loans (Loan), and Investments (Inv). The analysis employs fixed-effects (within) regression,

random-effects GLS regression, and the Hausman test to provide insights into the results.

Table 3. Effect of portfolio diversification on the Profitability of Banks

In the fixed-effects regression, which considers bank-specific fixed effects, the coefficients demonstrate the

were consistent with the results of Ongore and Kusa (2021), who found a significant positive effect of loans on

the financial performance of commercial banks in Kenya.

Investments (Inv): The coefficient for investments is not statistically significant (p-value = 0.811), suggesting

that changes in investments do not have a significant effect on ROA. The outcomes contradict the results of

Makau and Ambrose (2018), who found a positive and significant effect of investment on the financial

performance of investment firms listed on the Nairobi Securities Exchange, as well as those of Lamichhane

(2021), who obtained similar results from listed companies in Nepal.

Constant (_cons): The intercept term represents the baseline ROA when all independent variables are zero and

is statistically significant (p-value = 0.005). Moving on to the random-effects GLS regression, which accounts

for bank-specific random effects, the coefficients reveal the following effects on ROA: