The African Credit Trap
AbstractWe 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.
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Bibliographic InfoPaper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 10/18.
Date of creation: May 2010
Date of revision: Oct 2010
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Other versions of this item:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
This paper has been announced in the following NEP Reports:
- NEP-AFR-2010-06-18 (Africa)
- NEP-ALL-2010-06-18 (All new papers)
- NEP-BAN-2010-06-18 (Banking)
- NEP-CTA-2010-06-18 (Contract Theory & Applications)
- NEP-DEV-2010-06-18 (Development)
- NEP-IFN-2010-06-18 (International Finance)
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