Monetary policies and bank lending in developing countries: evidence from Sub-Sahara Africa

Abstract

PurposeThe purpose of this paper is to examine monetary policies and bank lending in the emerging economies of Sub-Sahara Africa.Design/methodology/approachThe dynamic system-generalized method of moments (GMM) that overcomes issues of unobserved period and country-specific effects, as well as potential endogeneity of explanatory variables, is applied in the estimation exercise. The study uses the data for 80 banks across 20 Sub-Saharan African countries from 2010 to 2019.FindingsThe findings show that expansionary monetary policy such as an increase in money supply stimulates bank lending, while contractionary monetary policies like increase in the monetary policy rates by the central banks lead to credit contraction, albeit a weak effect due to possible underdevelopment of financial markets, institutional constraints, bank concentration and other rigidities in the system characteristic of developing countries that undermine the effectiveness of monetary policy transmission. Capital adequacy ratio and size of economic activities are other variables that significantly influence bank lending channels.Practical ImplicationSub-Sahara Africa countries can enhance the effectiveness of monetary policy transmission on bank lending through the effective use of the transmission mechanism of changes in money supply and monetary policy rate.Originality/valueWhile greater empirical attention has been devoted to the nexus between monetary policies and macroeconomic variables in country-specific studies, the connection between monetary policies and bank lending at an extensive regional or cross-country level is still scanty. For Sub-Saharan Africa, there is a palpable lack of empirical evidence on this. This study, therefore, seeks to fill this gap in a region where the impact of monetary policies on credit intermediation is crucial to the economic diversification efforts of the governments of Sub-Sahara Africa.