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The African Credit Trap

  • Svetlana Andrianova

    ()

    (University of Leicester)

  • Badi H. Baltagi

    ()

    (Syracuse University, U.S., and University of Leicester, U.K.)

  • Panicos O. Demetriades

    ()

    (University of Leicester)

  • David Fielding

    ()

    (Department of Economics, University of Otago)

We put forward a plausible explanation of African financial underdevelopment in the form of a bad credit market equilibrium. Utilising an appropriately modified IO model of banking, we show that the root of the problem could be unchecked moral hazard (strategic loan defaults) or adverse selection (a lack of good projects). We provide empirical evidence from a large panel of African banks which suggests that loan defaults are a major factor inhibiting bank lending when the quality of regulation is poor. We also find that once a threshold level of regulatory quality has been reached, improvements in the default rate or regulatory quality do not matter, providing support for our theoretical predictions.

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File URL: http://www.business.otago.ac.nz/econ/research/discussionpapers/DP_1004.pdf
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Paper provided by University of Otago, Department of Economics in its series Working Papers with number 1004.

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Length: 31 pages
Date of creation: May 2010
Date of revision: May 2010
Handle: RePEc:otg:wpaper:1004
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  1. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  2. Svetlana Andrianova & Panicos Demetriades & Anja Shortland, 2002. "Government Ownership of Banks, Institutions, and Financial Development," Discussion Papers in Economics 02/13, Department of Economics, University of Leicester, revised Aug 2006.
  3. Paul Milgrom., 1987. "Adverse Selection without Hidden Information," Economics Working Papers 8742, University of California at Berkeley.
  4. Rioja, Felix & Valev, Neven, 2004. "Does one size fit all?: a reexamination of the finance and growth relationship," Journal of Development Economics, Elsevier, vol. 74(2), pages 429-447, August.
  5. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
  6. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, June.
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