Asset Diversification and Bank Credit Risk During COVID-19: Evidence from African Economies

The COVID-19 pandemic depressed household income and firm revenue, transmitting a broad real shock to bank loan portfolios. This study asks whether the composition of bank assets conditioned that transmission. Using data for 344 commercial banks in 47 African countries over 2010–2021, we estimate a difference-in-differences model comparing banks that entered the pandemic with above-median asset diversification against their less diversified peers. Unlike existing work, which relies on non-interest income, we measure diversification from the composition of the balance sheet, since several components of non-interest income are themselves generated by lending. Credit risk rose during the pandemic, and more diversified banks experienced a smaller increase in both non-performing loans and loan loss reserves. The result is robust to propensity-score matching and a placebo test; for loan loss reserves it also survives country-by-year fixed effects, pre-trend corrections and a continuous treatment, whereas for non-performing loans it loses precision once country-level shocks are absorbed. The effect does not reflect larger securities holdings or a flight to safety. The evidence is consistent with asset diversification acting as a buffer under a sectorally uneven real shock, and suggests that supervisors in bank-based emerging economies may usefully treat balance-sheet composition as a dimension of resilience.