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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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    Keywords

    Bank competition; Credit risk; Bank stability; Lerner index; Africa.;

    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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