INSTITUTIONAL DETERMINANTS OF NON-PERFORMING LOANS OF DEPOSIT MONEY BANKS IN SUB-SAHARAN AFRICA

Abstract

In the banking industry, the risk of Non-Performing Loans (NPLs) is quite substantial and its minimisation is essential for the growth of the industry and the economic development of Sub-Saharan Africa countries. This study focused on institutional factors as key determinants of NPLs of Deposit Money Banks in Sub-Saharan Africa. The study adopted an ex-post facto research design using a panel data covering the period 2006-2020. The data was collated from the World Bank Governance Indicators, World Bank Development Indicators and Heritage Foundation Database for the period under study. This study applied System GMM technique with an elaborated econometric method, based on a panel set from 23 Sub-Sahara African countries. Four institutional factors; namely control of corruption with coefficient value of (0.44%), financial freedom with coefficient value of (0.13%), rule of law with coefficient value of (0.341%) and regulatory quality with coefficient value of (-0.618%) were all significant on NPLs at (5%,) respectively. In conclusion, for banks in Sub-Saharan Africa to reduce the issues of NPLs and enhancing credit quality, both internal and external factors should be put into consideration for sustainable financial system stability. The study therefore, recommended among others, that government of Sub-Saharan Africa countries need to adopt effective legal restructuring with respect to bad loans, improve the functioning of their regulatory bodies, reduce corruption and government interference in banking businesses so as to decline the issues of NPLs

Keywords

• Non-Performing Loans
• Institutional Factors