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Title: The African Credit Trap
Authors: Andrianova, Svetlana
Baltagi, Badi H.
Demetriades, Panicos O.
Fielding, David
First Published: May-2010
Publisher: Dept. of Economics, University of Leicester
Abstract: 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.
Series/Report no.: Papers in Economics
Type: Report
Appears in Collections:Reports, Dept. of Economics

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