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Credit risk and bank competition in Sub-Saharan Africa

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  • M. Brei
  • L. Jacolin
  • A. Noah

Abstract

This paper investigates the impact of bank competition in Sub-Saharan Africa on bank non-performing loans, a measure of credit risk. Using bank-level data for a sample of 221 banks from 33 countries over the period 2000-15, we find a non-linear or U-shaped relationship between bank competition (measured by the Lerner Index) and credit risk. In other words, increased bank competition has the potential to lower credit risk via efficiency gains (lower credit cost, operational gains). However, the positive effects may be outweighed by adverse effects of excessive competition (lower profit margins, increased risk incentives). We also find that credit risk in Sub-Saharan Africa is not only related to macroeconomic determinants, such as growth, public debt, economic diversification, financial deepening and inclusion, but also to the regulatory environment. These results may provide useful insights on how to design and adapt prudential and regulatory frameworks to the specific needs in developing countries.

Suggested Citation

  • M. Brei & L. Jacolin & A. Noah, 2018. "Credit risk and bank competition in Sub-Saharan Africa," Working papers 664, Banque de France.
  • Handle: RePEc:bfr:banfra:664
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    Cited by:

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    2. Enrique Bátiz-Zuk & José Luis Lara Sánchez, 2021. "Revisiting the link between systemic risk and competition based on network theory and interbank exposures," Working Papers 2021-26, Banco de México.
    3. Irina Iakimenko & Maria Semenova & Eugeny Zimin, 2021. "The More The Better? Information Sharing And Credit Risk," HSE Working papers WP BRP 85/FE/2021, National Research University Higher School of Economics.
    4. Karadima, Maria & Louri, Helen, 2021. "Determinants of non-performing loans in Greece: the intricate role of fiscal expansion," LSE Research Online Documents on Economics 110741, London School of Economics and Political Science, LSE Library.
    5. Karadima, Maria & Louri, Helen, 2020. "Non-performing loans in the euro area: Does bank market power matter?," International Review of Financial Analysis, Elsevier, vol. 72(C).
    6. Kristina Kocisova & Martina Pastyriková, 2020. "Determinants of non-performing loans in European Union countries," Proceedings of Economics and Finance Conferences 10913085, International Institute of Social and Economic Sciences.
    7. Maria Karadima & Helen Louri, 2019. "Non-performing loans in the euro area: does market power matter?," Working Papers 271, Bank of Greece.
    8. Rakan Fuad Aldomy & Chan Kok Thim & Nguyen Thi Phuong Lan & Mariati Binti Norhashim, 2020. "Bank Concentration and Financial Risk in Jordan," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 16(3), pages 31-44.
    9. Votsoma Djekna & Timba Gaelle Tatiana & Nzihi Nziki Zenga, 2018. "The Influence of Operational Risk on the Performance of Banks' Financial Assets in Cameroon: Analysis of Non-performing Loans and Management Costs [L'influence Du Risque Opérationnel Sur Le Rendeme," Post-Print hal-03607165, HAL.
    10. Marcel Takoulac Kamta & Arsène Aurelien Njamen Kengdo & Alain Bertrand Ndzana Mekia & Franklin Dongmo Tsobjio, 2020. "Identification of risk-taking channel of monetary policy in Cameroon," Economic Research Guardian, Weissberg Publishing, vol. 10(2), pages 83-96, December.

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    More about this item

    Keywords

    Bank competition; Credit risk; Bank stability; Lerner index; Africa.;
    All these keywords.

    JEL classification:

    • 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
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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