Examining the Link Between Corruption and Bank Credit: The Case of Sub-Saharan Africa

Introduction

Finance is an integral part of every business regardless of its size. As firms grow, more capital is required to support both short and long-term operations (Imran & Nishat, 2013). Yet, there are obstacles most firms encounter in raising capital to undertake such activities (Yakubu et al., 2020). Also, the decision to either employ debt or equity finance poses some challenges for firms (Baoko et al., 2017). In the finance literature, there are two key theories explaining firms’ methods of financing. First is the trade-off theory, which argues for an optimum capital structure for firms. It postulates that increasing the use of debt creates benefits for firms in the form of tax shields (Myers, 1977). The pecking order theory alternates the trade-off theory, which emphasizes that firms prioritize internal financing, and will resort to debt at the expense of equity when requiring external finance (Myers & Majluf, 1984). This theory posits a hierarchical sequence in which firms make their financing decisions, prioritizing internal resources before considering external debt. Among the external financing sources, bank credit is the most resorted financing option (Baoko et al., 2017).

Bank credit availability is critical for boosting business activities, contributing significantly to economic growth particularly in developing economies and emerging markets (Imran & Nishat, 2013; Shafiu et al., 2023). Literature has shown that banks’ ability to advance credit is driven by several factors which are directly related to their activities. Notable among these factors include bank capital level, governance structure, risk level, etc. Other factors such as regulatory framework (Quagliariello, 2009), financial strength (Balazs et al., 2006), and macroeconomic settings (Cottarelli et al., 2005) to a large extent influence bank lending.

Given the boom-and-bust periods most economies encountered before and after the financial crisis which globally affected banking activities, research on the factors influencing bank credit advancement has gained much attention and has also become a contemporary theme in the banking literature.

Undoubtedly, research on bank credit determinants has growingly been in the direction of bank-specific variables and macroeconomic indicators. In the extant literature, several studies have appraised factors such as bank deposit, liquidity, and bank size (as bank-level variables) and economic growth (GDP), inflation, and exchange rate (as macroeconomic factors) to drive bank credit. The institutional environment plays a vital role in shaping a country’s economic activities including the banking sector. Banks' willingness to supply credit can be largely predicted by the quality of institutions. The relationship between institutional factors and bank credit growth has however escaped the attention of researchers, presenting a yawning gap in the existing literature. Hence, this study seeks to fill this lacuna by critically assessing the effect of corruption on bank credit advancement. The study emphasizes corruption because of its inimical impact on economic activities, including bank operations, particularly the effectiveness of funds mobilization and disbursement. For firms, corruption exacerbates the cost of doing business (Baxamusa & Jalal, 2014). Despite attempts by governments in Africa to tackle corruption, the level of corruption in the region keeps escalating.

The contribution of this study is that it adds to the scanty attempts on the institutional quality-bank credit nexus with an emphasis on corruption.

The rest of the chapter is structured as follows. Section 2 gives an overview of corruption in Sub-Saharan Africa and Section 3 extensively looks at the literature review. The empirical methods and techniques are presented in Section 4. While Section 5 discusses the empirical findings, Section 6 concludes the study.