Bank regulation and bank lending in selected sub-Saharan African countries

Abstract

Most countries, including the ones in sub-Saharan Africa (SSA), have been facing pressure to increase the stringency of bank regulation since the aftermath of the 2007-2008 global financial crisis. Therefore, this study analyses the relationship between bank regulation and bank lending in selected SSA countries and/or their low-income and middle-income groups from 1995 to 2017. First, the empirical results from the linear panel autoregressive distributed lag (ARDL) model estimated through the dynamic common correlated effects (CCE) method showed that bank entry barriers impacted bank lending negatively in the long run in all selected SSA economies and low-income SSA countries, while macroprudential policies had a negative long-run impact on bank credit in middle-income SSA economies, but supervisory power mitigated these effects. Alternatively, the findings from the nonlinear panel ARDL model indicated that various shocks to bank regulatory measures affected bank lending differently. Second, the dynamic panel threshold regression model results estimated through the generalised method of moments approach revealed that the threshold values for the stringency of bank entry barriers and capital regulations in the case of all selected SSA economies were 62.8% and 76.5%, respectively. The effect of bank entry barriers stringency on bank credit was found to be positive below its threshold value but negative above it, while that of capital regulation stringency was insignificant either below or above its threshold level. Lastly, the empirical findings from the panel error correction-based Granger causality models generally highlighted that long-run causality existed between bank regulatory measures and bank lending in the context of selected SSA countries and their income groups, while various shocks to bank regulatory measures and bank credit had different causal effects. Thus, the study recommends that policymakers should not introduce bank regulatory and supervisory reforms for their own sake, since regulations that are too stringent could hamper bank credit. Furthermore, regulatory authorities should take into consideration the existence of nonlinear and threshold effects in the relationship between bank regulation and bank lending as not doing so could lead to biased estimates and result in wrong policy conclusions.