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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. 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.
    2. 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.
    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.

    More about this item

    Keywords

    Africa; Banks/other depository institutions; Income smoothing; Investor protection; Macroeconomy; Loan loss provisions; Financial development; Economic cycle; C23; G21; G28; M41;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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