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Bank loan loss provisions, investor protection and the macroeconomy

Author

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  • Peterson K. Ozili

Abstract

Purpose - The purpose of this paper is to investigate the non-discretionary determinants of bank loan loss provisions in Africa after controlling for macroeconomic fluctuation, financial development and investor protection. Design/methodology/approach - The author uses static and dynamic regression estimation to test for the determinants of bank loan loss provisions. Findings - The author finds that non-performing loans (NPL), loan-to-asset ratio and loan growth are significant non-discretionary drivers of bank provisions in the African region. The author observes that bank provision is a positive function of NPL up to a threshold beyond which bank provisions will no longer increase as NPL increases. Also, bank loan-to-asset ratio is a significant driver of bank provisions when African banks have higher loan-to-asset ratios. The author finds that larger banks in financially developed African countries have fewer loan loss provisions while increase in bank lending leads to fewer bank provisions in countries with strong investor protection. Finally, higher bank lending is associated with higher bank provisions during economic boom. Originality/value - This study is the first to assess the determinants of non-discretionary bank provisions in Africa as part of micro-prudential surveillance of banks in the African region.

Suggested Citation

  • Peterson K. Ozili, 2018. "Bank loan loss provisions, investor protection and the macroeconomy," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 13(1), pages 45-65, January.
    • Handle: RePEc:eme:ijoemp:ijoem-12-2016-0327
    DOI: 10.1108/IJoEM-12-2016-0327
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    Citations

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    Cited by:

    1. Karim Farag & Taha Kassem & Yasmine Ramzy, 2023. "The Crucial Macroeconomic and Microeconomic Determinants of Retail and Corporate Credit Risks," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 13(2), pages 30-41.
    2. Zhang, Ying & Zhai, Ling & Sun, Haijia, 2019. "Does the level of financial leasing matter in the impact of bank lending on economic growth: Evidence from the global market (2006–2016)," Finance Research Letters, Elsevier, vol. 30(C), pages 352-359.
    3. Yosra Mnif & Imen Slimi, 2023. "Former auditors on the audit committee and earnings management: Evidence from African banks," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 2383-2420, June.
    4. Peterson K. Ozili & Thankom G. Arun, 2023. "What drives bank income smoothing? Evidence from Africa," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 20(3), pages 274-295, September.
    5. Ozili, Peterson K., 2019. "Bank income smoothing, institutions and corruption," Research in International Business and Finance, Elsevier, vol. 49(C), pages 82-99.
    6. Peterson K. Ozili, 2022. "Determinants of bank income smoothing using loan loss provisions in the United Kingdom," Journal of Economic and Administrative Sciences, Emerald Group Publishing Limited, vol. 40(3), pages 641-657, February.
    7. Albulena Shala & Valentin Toçi & Skender Ahmeti, 2020. "Income smoothing through loan loss provisions in south and Eastern European banks," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 38(2), pages 429-452.
    8. Peterson K. Ozili, 2019. "Bank loan loss provisioning during election years: cross-country evidence," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 16(4), pages 413-431, December.
    9. Ozili, Peterson K, 2019. "Bank Earnings Management using Commission and Fee Income: the Role of Investor Protection and Economic Fluctuation," MPRA Paper 101824, University Library of Munich, Germany.
    10. Peterson K. Ozili, 2020. "Financial inclusion and business cycles," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 13(2), pages 180-199, August.
    11. Peterson K. Ozili, 2019. "Bank loan loss provisions, risk-taking and bank intangibles," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 9(1), pages 21-39.

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    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • A11 - General Economics and Teaching - - General Economics - - - Role of Economics; Role of Economists
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F3 - International Economics - - International Finance
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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