Effect of Monetary Policy on Non-Performing Loans in Sub-Saharan Africa: A Panel Vector Autoregressive Approach

Abstract Banks play a vital role in a country’s financial system through their intermediation activities, which support economic development. However, the rise in non-performing loans (NPLs) has jeopardized the performance of banks in Sub-Saharan Africa (SSA). Moreover, the behavior of key macroeconomic factors and shocks to monetary policy are closely linked to this issue. This study examines the impact of monetary policy on NPLs in SSA using a panel vector autoregressive model, based on quarterly data from 23 countries spanning 2008Q1 to 2023Q4. The findings reveal that monetary policy shocks significantly affect NPL levels in SSA. Additionally, excessive domestic and external borrowing, inflationary pressures, and exchange rate volatility have substantial consequences for NPL accumulation. This study offers valuable insights into how macroeconomic factors interact to create banking stress and fragility, ultimately undermining financial stability in the region. It recommends that monetary authorities and governments implement credible monetary policies and maintain a stable macroeconomic environment to safeguard the financial sector.