Bank loan loss provisions, investor protection and the macroeconomy

Abstract

Purpose

The purpose of this paper is to investigate the non-discretionary determinants of bank loan loss provisions in Africa after controlling for macroeconomic fluctuation, financial development and investor protection.

Design/methodology/approach

The author uses static and dynamic regression estimation to test for the determinants of bank loan loss provisions.

Findings

The author finds that non-performing loans (NPL), loan-to-asset ratio and loan growth are significant non-discretionary drivers of bank provisions in the African region. The author observes that bank provision is a positive function of NPL up to a threshold beyond which bank provisions will no longer increase as NPL increases. Also, bank loan-to-asset ratio is a significant driver of bank provisions when African banks have higher loan-to-asset ratios. The author finds that larger banks in financially developed African countries have fewer loan loss provisions while increase in bank lending leads to fewer bank provisions in countries with strong investor protection. Finally, higher bank lending is associated with higher bank provisions during economic boom.

Originality/value

This study is the first to assess the determinants of non-discretionary bank provisions in Africa as part of micro-prudential surveillance of banks in the African region.

Citation

Ozili, P.K. (2018), "Bank loan loss provisions, investor protection and the macroeconomy", International Journal of Emerging Markets, Vol. 13 No. 1, pp. 45-65. https://doi.org/10.1108/IJoEM-12-2016-0327