Geographic Diversification to Hedge Risks: How Plausible is it for the Multinational Banks in Sub Saharan Africa?

Abstract

Risks negatively affect firm performance. Economics theory posits that diversification strategy is one way firms hedge risks. However, the extent diversification can be effective in mitigating risk effects depends on many factors including the form in which hedging is to be shaped. This paper investigates the moderating role of geographic diversification on the effect of country risk on performance of multinational banks in sub Saharan Africa. Sub Saharan Africa is generally characterized by high level of country risk. The investigated question is ‘does geographic diversification by multinational banks in sub Saharan Africa help improve their performance by reducing risk effects? Using a systems generalized method of moments estimation procedure on panel data of the published best performing multinational banks in 2016, and composite country risk indices for the sub Saharan African countries (2007-2017), the study finds that geographic diversification has risk hedging effects that help improve the multinational bank’s performance. This however does not guarantee that banks with high level of geographic diversification are more strongly shielded from country risk effects. At large, for firms whose operations are in multitude countries, geographic diversification helps to significantly shield banks from the country risk effect.

Keywords: Geographic diversification, Risk hedging, Multinational banks, Sub Saharan Africa