Ethnic Fractionalization, Governance and Loan Defaults in Africa

48 Pages Posted: 5 Nov 2014

See all articles by Svetlana Andrianova

Svetlana Andrianova

University of Leicester - Department of Economics

Badi H. Baltagi

Syracuse University - Maxwell School of Citizenship and Public Affairs; IZA Institute of Labor Economics; Syracuse University - Center for Policy Research

Panicos Demetriades

University of Leicester - Department of Economics

David Fielding

University of Otago - School of Business - Department of Economics

Date Written: October 24, 2014

Abstract

We present a theoretical model of moral hazard and adverse selection in an imperfectly competitive loans market that is suitable for application to Africa. The model allows for variation in both the level of contract enforcement (depending on the quality of governance) and the degree of market segmentation (depending on the level of ethnic fractionalization). The model predicts a specific form of non-linearity in the effects of these variables on the loan default rate. Empirical analysis using African panel data for 111 individual banks in 29 countries over 2000-2008 provides strong evidence for these predictions. Our results have important implications for the conditions under which policy reform will enhance financial development.

Keywords: ethnic fractionalization, governance, financial development, African banks, panel data

JEL Classification: G210, O160

Suggested Citation

Andrianova, Svetlana and Baltagi, Badi H. and Demetriades, Panicos O. and Fielding, David, Ethnic Fractionalization, Governance and Loan Defaults in Africa (October 24, 2014). CESifo Working Paper Series No. 5042, Available at SSRN: https://ssrn.com/abstract=2519452

Svetlana Andrianova

University of Leicester - Department of Economics ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

Badi H. Baltagi (Contact Author)

Syracuse University - Maxwell School of Citizenship and Public Affairs ( email )

400 Eggers Hall
Syracuse, NY 13244
United States

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

Syracuse University - Center for Policy Research ( email )

Syracuse, NY 13244
United States
315-443-1630 (Phone)
315-443-1081 (Fax)

HOME PAGE: http://www.maxwell.syr.edu/cpr_about.aspx?id=6442451316

Panicos O. Demetriades

University of Leicester - Department of Economics ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom
+ 44 116 252 2835 (Phone)
+ 44 116 252 2908 (Fax)

HOME PAGE: http://www.le.ac.uk/economics/staff/pd28.html

David Fielding

University of Otago - School of Business - Department of Economics ( email )

PO Box 56
Dunedin
New Zealand

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