Explaining Banking Failures in Africa

Abstract

Bank crises have recently caught the attention of researchers in Africa because of the growing number of cases and the potential for economic losses occasioned by the systemic failure of banks. In this article, the authors document the causes of bank crises in Africa, the social and economic consequences of bank failures, the remedies that have been applied by supervisory agencies, and the lessons for the future. The paper finds that globally, bank crises have been associated with unfavorable economic conditions, regulatory failure, poor corporate governance practices, non-performing loans, poor management practices, fraudulent and corrupt dealings, and poor risk management. In Africa, prevalent causal factors include currency crises and state ownership. Central banks are equipped with the necessary tools to deal with failing banks such as liquidity support, bailouts and mergers, and acquisition. In order to deploy these tools effectively, however, central banks need to strengthen their capacity for effective supervision and monitoring, pursue ongoing reform of the regulatory framework to anticipate emerging risks, and focus on the soundness of the overall financial and economic system.