Bank Loan Loss Provisions, Investor Protection and the Macroeconomy
International Journal of Emerging Markets (2018)
33 Pages Posted: 24 Jul 2017 Last revised: 2 Mar 2019
Date Written: 2018
This study investigates the non-discretionary determinants of bank loan loss provisions in Africa after controlling for macroeconomic fluctuation, financial development and investor protection. We find that non-performing loans, loan-to-asset ratio and loan growth are significant non-discretionary drivers of bank provisions in the African region. We observe that bank provision is a positive function of non-performing loans up to a threshold beyond which bank provisions will no longer increase as non-performing loans increases. Also, bank loan-to-asset ratio is a significant driver of bank provisions when African banks have higher loan-to-asset ratios. Also, larger banks in financially developed African countries have fewer loan loss provisions while increase in bank lending leads to fewer bank provisions in countries with strong investor protection. Finally, higher bank lending is associated with higher bank provisions during economic boom. The findings have implications.
Keywords: Loan Loss Provisions, Africa, Income Smoothing, Procyclicality, Economic Cycle, Investor Protection, Banks, Macroeconomy, Credit Risk, Financial Development
JEL Classification: C23, G21, G28, M41
Suggested Citation: Suggested Citation