ANALYSIS OF EFFECT OF MACROECONOMIC VARIABLES ON NON-PERFORMING LOANS IN SUBSAHARAN AFRICA

Ernest Njiru Mwaniki, Benedict Troon, Christopher Maokomba

Abstract


The average non-performing loans (NPLs) ratio in Sub-Saharan Africa (SSA) is more than 10%, almost double the prudential benchmark limit of 5%. Sustainable Development Goal 8.10 is under threat, and the current situation is jeopardizing bank solvency and access to credit. But the ratios of non-performing loans vary greatly across economies. Existing evidence mainly consists of single-country studies, pooled estimators that apply common slopes, and models that overlook the fiscal channel. This study examines the long-term effects of inflation, the bank lending rate, and tax revenue (as a percentage of GDP) on NPLs in Angola, Botswana, Kenya, and Nigeria, while also comparing the specific adjustment dynamics of each country. A panel autoregressive distributed lag error-correction model is used to analyse 56 observations of annual World Bank data from 2010 to 2023. Panel unit-root tests classify NPLs, the lending rate and tax revenue as I(1) and inflation as I(0). The Hausman test (χ² = 2.042, p = .564) does not reject long-run homogeneity, favoring the pooled mean group (PMG) estimator over the mean group estimator. Groupwise heteroskedasticity in the baseline PMG model is corrected by feasible generalized least squares re-estimation, after which all diagnostic tests are satisfied. In the final model, a one-percentage-point rise in the lending rate is associated with a 1.565-point rise in NPLs (p = .005) and in inflation with a 0.362-point rise (p = .046), whereas a one-point increase in tax revenue to GDP is associated with a 1.268-point fall (p = .035). Adjustment speeds differ markedly: Angola (−0.847) and Nigeria (−0.642) correct disequilibria rapidly, while adjustment in Kenya (−0.037) and Botswana (0.000) is negligible. The Central banks and financial institutions in these countries should strengthen inflation-targeting frameworks and increase foreign exchange reserve buffers; banks should increase forward-looking loan-loss provisions, stress-test loan portfolios, and expand fixed-rate and hybrid-rate lending products; and finance ministries should prioritize broadening the domestic tax base and diversifying government revenue away from oil-related revenue.

 

JEL: G21, E31, E43, H20, C23, O55


Keywords


non-performing loans, inflation, lending interest rates, tax revenue, Sub-Saharan Africa, macroeconomic variables, Pooled Mean Group (PMG)

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DOI: http://dx.doi.org/10.46827/ejefr.v10i7.2333

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