Bank fragility in Africa: GMM dynamic panel data evidence

Abstract

This study investigates the impact of bank-level and macroeconomic variables on bank fragility using a dynamic two-step GMM panel estimator on 433 banks in 46 African countries over the period 1997-2012. The study finds that both bank characteristics and macroeconomic variables are key drivers of bank fragility. The past experience of higher levels of non-performing loans (NPLs) significantly and positively determines current levels of NPLs. The growth of gross loan is negative and significant but economic growth leads to higher NPLs. The equity to assets ratio and the log of assets of banks are negatively associated with NPLs suggesting their potential to provide buffers to banks. Equally, total assets reduce bank fragility. These findings have important policy implications. The study shows that credit risk management initiatives, bank operation oversight and regulations should not be restricted in the times of financial crises, even during positive economic growth episodes in the business cycle.

An empirical analysis on the impact of non-performing loans on investment and economic growth and the role of political governance

“…Though economic growth is one of the remedies for solving the nonperforming loan issue, sometimes the growth leads to the accumulation of NPL. Kedir, et al (77) and Inekwe (108) bolstered this claim by concluding that economic growth leads to higher NPL. The reason behind is that a growing economy is followed by increased investments or investment capabilities.…”

“…There are several other determinants of NPL which are sometimes out of the jurisdiction and control of the political government. Aspects of corporate governance like credit risk management, careful assessment and supervision of the functioning of the private banks also regulate the NPL level (77) . Ikram, et al (78) mentioned that bank-specific factors like branch age, duration of loan, credit policy and others regulate NPL accumulation.…”

Loan Asset Indicators and Commercial Bank Fragility in Kenya

“…This process is disrupted when there is bank instability. Kedir, Iftikhar, Murinde and Kamgnia (2018) hold that bank characteristics are a key driver of fragility. However, Gorton (2018) asserts that financial crises have taken place in market economies throughout history.…”

Insider Loans, Loan Quality and Their Predictive Ability of Commercial Bank Fragility in Kenya

“…The causes of bank distress are diverse, Bernanke (1983); Kaufmann (1988); Wheelock & Wilson (2000) find that USA bank distress of 1920s were caused by severe problems in the agricultural sector due to natural causes upon which many small rural banks foundered; a clear case of minimal sectoral and agricultural diversification.…”

“…Corruption, fraud and violations of laws have also been found to cause bank distress. Alston & Grove (1994); Kaufmann (1988); Chijoriga (1999) and Aharony & Swary (1983) point out that fraud is a cause of bank distress. Alston et al, aver that fraud becomes rampant when bankers conceal detection of malpractice.…”