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Why Do African Banks Lend so Little?

By Svetlana Andrianova, Badi H. Baltagi, Panicos O. Demetriades and David Fielding


We put forward a plausible explanation of African financial\ud under-development in the form of a bad credit market equilibrium. Utilis-\ud ing an appropriately modified IO model of banking, we show that the root\ud of the problem could be unchecked moral hazard (strategic loan defaults)\ud or adverse selection (a lack of good projects). Applying a dynamic panel\ud estimator to a large sample of African banks, we show that loan defaults\ud are a major factor inhibiting bank lending when the quality of regulation\ud is poor. We also find that once a threshold level of regulatory quality has\ud been reached, improvements in the default rate or regulatory quality do\ud not matter, providing support for our theoretical predictions

Topics: Dynamic panel data, African financial under-development, African credit markets
Publisher: Dept. of Economics, University of Leicester
Year: 2011
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  1. (2010). African financial systems: a review.’ SSRN working paper id 1569613

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