Why Do African Banks Lend so Little?

21 Pages Posted: 27 Apr 2015

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: June 2015

Abstract

We put forward a plausible explanation of African banking sector under‐development in the form of a bad credit market equilibrium. Using an appropriately modified Industrial Organization model of banking, we show that the root of the problem could be unchecked moral hazard (strategic loan defaults) or adverse selection (a lack of good projects). Applying a dynamic panel estimator to a large sample of African banks, we show that loan defaults are a major factor inhibiting bank lending when institutional quality is low. We also find that once a threshold level of institutional quality has been reached, improvements in the default rate or institutional quality do not matter. This provides support for our theoretical predictions.

Suggested Citation

Andrianova, Svetlana and Baltagi, Badi H. and Demetriades, Panicos O. and Fielding, David, Why Do African Banks Lend so Little? (June 2015). Oxford Bulletin of Economics and Statistics, Vol. 77, Issue 3, pp. 339-359, 2015, Available at SSRN: https://ssrn.com/abstract=2598832 or http://dx.doi.org/10.1111/obes.12067

Svetlana Andrianova (Contact Author)

University of Leicester - Department of Economics ( email )

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

Badi H. Baltagi

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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