How Does the Institutional Setting for Creditor Rights Affect Bank Lending and Risk-Taking?

Kupukile Mlambo, Victor Murinde and Tianshu Zhao

No 2011-03, Stirling Economics Discussion Papers from University of Stirling, Division of Economics

Abstract: This paper investigates how the institutional setting for protection of creditor rights affects bank lending and risk-taking. An analytical model is specified to underpin banks‟ portfolio decisions, between loans and other earning assets such as government securities. The model is augmented with various metrics, which proxy the institutional setting for creditor rights, and is estimated and tested on an unbalanced three-dimensional dataset of commercial banks in 20 African countries for 1995-2008. It is found that three specific metrics induce banks to allocate a high proportion of their earning assets to loans: legal creditor rights; the efficient enforcement of creditor rights; and availability of information sharing mechanisms among banks. However, the three metrics appear to work through different channels. The enforceability of legal rights works not only through mitigating credit risks, but also through a composite effect of market competition and lower costs of information acquisition and contract enforcement. The legal rights metric and information sharing metric exclusively rely on the composite effect.

Keywords: Africa; Bank risk-taking; Bank lending; Information sharing; Law enforcement; Creditor rights (search for similar items in EconPapers)
Date: 2011-02
New Economics Papers: this item is included in nep-afr, nep-ban and nep-cfn
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