Bank Loans, Default Probabilities, and Differential Credit Treatment in Sub-Saharan Banks

Henok Neguse Negash ,Hu Hongbing

doi:10.7176/rjfa/11-14-04

Abstract

This paper investigates the bank credits, default probabilities, and differential credit treatment in banks of 16 selected Sub-Saharan Africa (SSA) countries by inclusion of annual data of 20 years. The parameters used were obtained from World Bank Development Indicators online database (WDI), Africa Development Bank (ADB), International Monetary Fund (IMF), International Financial Statistics (IFS), and Regional Economic Outlook. By mitigating the problems of spurious causality and unobserved heterogeneity, panel estimation techniques overcome common weaknesses of most cross-country approaches. Panel estimation techniques often give all countries, either small or large, an equal weighting since they are assumed to be homogeneous and the coefficients represent only average relationship, which may or may not apply to individual countries in the sample. Following Arellando and Bond (1991) and as later used by Christopoulous and Tsionas (2004), and Baltagi et al. (2008) a dynamic Generalized Method of Moments (GMM) is applied in the assessment. A dynamic panel estimator allows for the exploitation of time series variations in the data, accounts for unobserved country specific effects, allows for the inclusion of lagged variables as regressors, and controls for endogeneity of all explanatory variables. Keywords : Bank Loans, Capital Adequacy, Default Probabilities, Differential Credit Treatment, Sub-Saharan Africa Banks DOI : 10.7176/RJFA/11-14-04 Publication date: July 31st 2020

Highlights

IntroductionThe overall depth and financial sophistication of the banking sectors in sub-Saharan Africa (hereafter Sub-Saharan Africa (SSA)) is still in its growth stage by global standards
The overall depth and financial sophistication of the banking sectors in sub-Saharan Africa is still in its growth stage by global standards
The results suggest that increase in Claims on central government will adversely affect the availability and liquidity of banks to provide sufficient amount of loans to the private sector

Summary

Introduction

The overall depth and financial sophistication of the banking sectors in sub-Saharan Africa (hereafter SSA) is still in its growth stage by global standards. The International Monetary Fund working paper of May, 2009 prepared by Corrine Delchat, Gustavo Ramirez, Smita Wagh, and John Wakeman-Linn shows the integration of Sub-Saharan Africa to the Global Financial Markets under which the Banks play a major role by having a well-developed counterparty default management and expansion of risk bearing ability which eventually leads to more capital inflows and attract investors. These banks are expected to behave in multi-directional ways; expanding lending ability, integrate with the global financial system, and more importantly enhance counterparty (credit) risk management. It is necessary to study the nature and size of the bank loans practiced, the default probabilities, the methodology of extending credit risk bearing capabilities without affecting the existing operations, introducing competitive loan pricing strategies, the differential treatment of credit granting technics, and creating credit risk management systems

Methodology

Summary statistics of variables

Robustness of results

Conclusion