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The African Credit Trap

Svetlana Andrianova (), Badi Baltagi (), Panicos Demetriades () and David Fielding ()

No 10/18, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: We put forward a plausible explanation of African financial underdevelopment in the form of a bad credit market equilibrium. Utilising an appropriately modified IO 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). We provide empirical evidence from a large panel of African banks which suggests that loan defaults are a major factor inhibiting bank lending when the quality of regulation is poor. We also find that once a threshold level of regulatory quality has been reached, improvements in the default rate or regulatory quality do not matter, providing support for our theoretical predictions.

Keywords: Dynamic panel data; African financial under-development; African credit markets (search for similar items in EconPapers)
JEL-codes: G21 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-afr, nep-ban, nep-cta, nep-dev and nep-ifn
Date: 2010-05, Revised 2010-10
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