Author: Brownbridge, Martin
Publication: United Nations Conference on Trade and Development, 1998
Abstract: Banks and non-bank financial institutions have been set up by local private sector investors in several African countries. The local banks can provide benefits to the domestic economies but they also present risks, with many having suffered financial distress and bank failure as a result of non-performing loans. The severity of bad debt problems was attributable to moral hazard on bank owners and the adverse selection of bank borrowers, with many banks pursuing imprudent lending strategies, in some cases involving insider lending. Low levels of capitalization, the political connections of bank owners, and access to public-sector deposits contributed to moral hazard. Regulatory policy should aim to strengthen prudential supervision of local banks, particularly of credit policies, to enforce banking regulations and improve the incentives on bank owners to pursue prudent management.