Why Do African Banks Lend so Little? A Plausible Explanation of African Financial Under-Development

Mar 01, 2011 | S. Andrianova, B.H. Baltagi et al. | University of Leicester

The authors put forward a plausible explanation of African financial under-development in the form of a bad credit market equilibrium. Utilising an appropriately modified IO model of banking, and a dynamic panel estimator, they show that loan defaults are a major factor inhibiting bank lending when the quality of regulation is poor. The authors also find that once a threshold level of regulatory quality has been reached, improvements in the default rate or regulatory quality do not matter.