Political Business Cycle, Corporate Transparency and Bank Lending in Africa

ABSTRACT: This study examines how political business cycles (PBC) influence bank lending in Africa in the presence of corporate transparency. While existent empirical studies show that PBC is associated with increased bank lending which is often followed by increased credit losses, risk and defaults, the literature is silent on which specific type of bank lending is affected by PBC and how corporate transparency (CT) can be used as tool for taming increasing effect of PBC on different types of bank lending. Following from this, this present study examines how PBC affects different bank lending types and how CT modulates the effect of PBC on different types of bank lending in Africa. The study employs panel fixed effect model of 57 banks across 29 African economies between 2006 and 2015 and controls for technological and year effects. The results show that while PBC has positive effect on commercial/corporate, retail, other and aggregate loans but a negative effect on inter-bank loans implying that PBC does not increase all types of bank lending. Similarly, CT has positive and negative effects on aggregate and retail loans respectively. This shows that corporate transparency has varying effects on different types of bank lending. In terms of the joint effect of PBC and CT, positive synergetic effect is observed on inter-bank loans while a negative synergetic effect is observed on all other types of bank loans. These results show that increasing (decreasing) CT reduces (increases) the increasing (decreasing) effect of PBC on different bank lending types implying that CT can serve as modulating tool for bank managers and regulators to reduce the propelling effect of PBC on bank lending which usually creates credit risk problems in banking systems. The results imply that while bank managers and regulator must be mindful of PBCs because it has implications on the volume of loans granted by banks, improving CT helps suppress the increasing effect of PBC on bank lending. Hence, policymakers and regulators must enact laws and put in measures that promote CT to reduce the inducing electioneering effects on bank lending which is often harmful for the banking systems.