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Baltagi article on African banks published in Oxford Bulletin of Economics and Statistics

May 31, 2015

Why Do African Banks Lend So Little?

Svetlana Andrianova, Badi H. Baltagi, Panicos Demetriades & David Fielding

Oxford Bulletin of Economics and Statistics, May 2015

Badi H. Baltagi

Badi H. Baltagi

The authors 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.