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Ethnic fractionalization, governance, and loan defaults in Africa

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  • Svetlana Adrianova
  • Badi H. Baltagi
  • Panicos Demetriades
  • David Fielding

Abstract

We present a theoretical model of moral hazard and adverse selection in an imperfectly competitive loans market that is suitable for application to Africa. The model allows for variation in both the level of contract enforcement (depending on the quality of governance) and the degree of market segmentation (depending on the level of ethnic fractionalization). The model predicts a specific form of non-linearity in the effects of these variables on the loan default rate. Empirical analysis using African panel data for 111 individual banks in 29 countries over 2000-2008 provides strong evidence for these predictions. Our results have important implications for the conditions under which policy reform will enhance financial development.

Suggested Citation

  • Svetlana Adrianova & Badi H. Baltagi & Panicos Demetriades & David Fielding, 2015. "Ethnic fractionalization, governance, and loan defaults in Africa," CSAE Working Paper Series 2015-12, Centre for the Study of African Economies, University of Oxford.
  • Handle: RePEc:csa:wpaper:2015-12
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    1. repec:pal:compes:v:60:y:2018:i:1:d:10.1057_s41294-017-0047-z is not listed on IDEAS

    More about this item

    Keywords

    Ethnic fractionalization; Governance; Financial development; African Banks; Panel data;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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