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Nonperforming loans in Sub-Saharan Africa : causal analysis and macroeconomic implications

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  • Fofack, Hippolyte L.
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    Abstract

    This paper investigates the leading causes of nonperforming loans during the economic and banking crises that affected a large number of countries in Sub-Saharan Africa in the 1990s. Empirical analysis shows a dramatic increase in these loans and extremely high credit risk, with significant differences between the CFA and non-CFA countries, and substantially higher financial costs for the latter sub-panel of countries. The results also highlight a strong causality between these loans and economic growth, real exchange rate appreciation, the real interest rate, net interest margins, and interbank loans consistent with the causality and econometric analysis, which reveal the significance of macroeconomic and microeconomic factors. The dramatic increase in these loans is largely driven by macroeconomic volatility and reflects the vulnerability of undiversified African economies, which remain heavily exposed to external shocks. Simulated results show that macroeconomic stability and economic growth are associated with a declining level of nonperforming loans; whereas adverse macroeconomic shocks coupled with higher cost of capital and lower interest margins are associated with a rising scope of nonperforming loans. These results are supported by long-term estimates of nonperforming loans derived from pseudo panel-based prediction models.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3769.

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    Date of creation: 01 Nov 2005
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    Handle: RePEc:wbk:wbrwps:3769

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    Keywords: Banks&Banking Reform; Investment and Investment Climate; Financial Intermediation; Financial Crisis Management&Restructuring; Municipal Financial Management;

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    1. Brenda González-Hermosillo & Ceyla Pazarbaşioğlu & Robert Billings, 1997. "Determinants of Banking System Fragility: A Case Study of Mexico," IMF Staff Papers, Palgrave Macmillan, vol. 44(3), pages 295-314, September.
    2. Célestin Monga, 1997. "A Currency Reform Index for Western and Central Africa," The World Economy, Wiley Blackwell, vol. 20(1), pages 103-126, 01.
    3. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, Econometric Society, vol. 37(3), pages 424-38, July.
    4. Demirguc-Kunt, Asli & Detragiache, Enrica & Gupta, Poonam, 2006. "Inside the crisis: An empirical analysis of banking systems in distress," Journal of International Money and Finance, Elsevier, Elsevier, vol. 25(5), pages 702-718, August.
    5. Françoise Le Gall & Roland Daumont & François Leroux, 2004. "Banking in Sub-Saharan Africa," IMF Working Papers 04/55, International Monetary Fund.
    6. Demirguc-Kunt, Asli & Huizinga, Harry, 2000. "Financial structure and bank profitability," Policy Research Working Paper Series 2430, The World Bank.
    7. Ceyla Pazarbasioglu & Claudia Helene Dziobek, 1997. "Lessons From Systemic Bank Restructuring," IMF Working Papers 97/161, International Monetary Fund.
    8. Caprio Jr., Gerard, 1997. "Safe and sound banking in developing countries : we're not in Kansas anymore," Policy Research Working Paper Series 1739, The World Bank.
    9. Christian A. Emini & Hippolyte Fofack, 2004. "A financial social accounting matrix for the integrated macroeconomic model for poverty analysis : application to Cameroon with a fixed-price multiplier analysis," Policy Research Working Paper Series 3219, The World Bank.
    10. International Monetary Fund, 2000. "Loan Review, Provisioning, and Macroeconomic Linkages," IMF Working Papers 00/195, International Monetary Fund.
    11. Poonam Gupta & Asli Demirgüç-Kunt & Enrica Detragiache, 2000. "Inside the Crisis," IMF Working Papers 00/156, International Monetary Fund.
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    Cited by:
    1. Bayraktar, Nihal & Fofack, Hippolyte, 2007. "Specification of investment functions in Sub-Saharan Africa," Policy Research Working Paper Series 4171, The World Bank.
    2. Vasiliki Makri & Athanasios Tsagkanos & Athanasios Bellas, 2014. "Determinants of Non-Performing Loans: The Case of Eurozone," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(2), pages 193-206, March.
    3. Sabbah Gueddoudj, 2013. "Fluctuations Economiques et Dynamiques de la Constitution de Provisions Pour Créances Douteuses des Banques Luxembourgeoises," BCL working papers, Central Bank of Luxembourg 81, Central Bank of Luxembourg.

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