Why Do African Banks Lend So Little? |
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| Authors: | Svetlana Andrianova Badi Baltagi Panicos Demetriades David Fielding |
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| Institution: | 1. Department of Economics, Leicester University, Leicester, UK;2. Department of Economics and Center for Policy Research, Syracuse University, Syracuse, USA;3. Department of Economics, University of Otago, Dunedin, New Zealand |
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| 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. |
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