Effect of Loan Portfolio Diversification on Financial Performance of Rural Banks in Akwa Ibom State

Loan portfolio diversification is a fundamental risk management strategy for rural banks, and its effect on financial performance is particularly significant for institutions operating in economically diverse communities of the South South zone of Nigeria. This study examines the effect of loan portfolio diversification on the financial performance of rural banks in Akwa Ibom State. Secondary data were sourced from the audited annual financial statements of eight rural and microfinance banks in Uyo, Eket, and Oron Local Government Areas for the period 2017 to 2022. Loan portfolio diversification was measured by the Herfindahl-Hirschman Index of sectoral loan concentration. Financial performance was measured by return on assets, return on equity, and profit after tax. Panel data regression analysis was conducted, with the random effects estimator selected following the Hausman test. Results indicated a significant negative relationship between the Herfindahl-Hirschman Index and return on assets (coefficient = -0.042, p < 0.05), implying that higher diversification (lower concentration) is associated with better profitability. Banks concentrated in fisheries and agriculture lending alone recorded the highest non-performing loan ratios during 2020 and 2021. Moderate diversification across agriculture, trade finance, and salary loans produced the best risk-adjusted returns. The study concludes that rural banks in Akwa Ibom State benefit significantly from moderate loan portfolio diversification and recommends sector-balanced lending guidelines for rural financial institutions in the South South geopolitical zone. Keywords: loan portfolio diversification, financial performance, rural banks, Akwa Ibom State, South South Nigeria