Bank risks, capital and loan supply: evidence from Sierra Leone

Abstract

PurposeThe study aims to investigate the factors that influence banks' loan supply in Sierra Leone. More specifically, it seeks to look into the effects of risk premium, leverage ratio and credit risk on banks' loan supply in Sierra Leone.Design/methodology/approachUsing annual bank level data on an unbalanced panel of 13 commercial banks data observed over a period of ten years (2002 to 2011), the study employs time and bank‐specific fixed effects model for estimation.FindingsThe findings indicate that risk premium, the share of non‐performing loans in the banks' loan portfolio, tier 1 capital ratio (leverage ratio) and local currency deposit levels positively and significantly affect the share of loan supply to the private sector in banks' earning assets. On the other hand, advances to local currency deposit ratio and bank size have significant negative effects on the share of loans in banks assets. The study also finds bank type and the growth rate of real GDP (a proxy for economic activity) to be important determinants of the share of loans in banks' earning assets.Practical implicationsThe study recommends that the monetary authorities, banking practitioners and the government should pay keen attention to the key risk factors such as non‐performing loans and risk premium in the operation of the banking sector to boost commercial banks' loan supply.Originality/valueSierra Leone's banking sector presents a unique opportunity to study bank loan supply in relation to bank‐specific features in the context of post‐war financial reconstruction.