# **VI. Concluding Remarks**

This paper explores the leading causes of nonperforming loans in Sub-Saharan Africa in the 1990s, using causality and pseudo-panel models. The results show a dramatic increase in nonperforming loans and heightened credit risks, with considerable gaps between the subpanels of CFA and non-CFA countries. These risks reflect the rapid accumulation of impaired loans, and are largely driven by macroeconomic volatility and terms of trade deterioration. They are particularly high in the agricultural sector and illustrate the extremely high vulnerability of African economies which, in the absence of diversification, remain heavily exposed to macroeconomic and exogenous shocks.

In addition to terms of trade deterioration, there are other leading causes of banking crises in Sub-Saharan Africa. A Granger-Causality analysis identifies inflation, real interest rate, growth rate of GDP per capita, net interest margins, return on assets, interbank loans as other possible determinants. The Granger-Causality results are further corroborated with a pseudopanel analysis which highlights the preeminence of macroeconomic volatility in explaining the proportional variance of these loans. Real exchange rate, interest rates and growth rate of GDP per capita are particularly robust and significant. Credit risks tend to be particularly high during episodes of sustained economic downturns. Interesting enough, inflation does not appear to be particularly significant in explaining the dynamics on nonperforming loans, especially in the sub-panel of CFA countries, in spite of post-devaluation inflationary pressures of the mid-1990s. Inflationary effects are stronger in the sub-panel of non-CFA countries, however. Indeed, in some of these countries, the allocation of a large amount of credit to distressed banks by the Central Bank was a source of monetary expansion and fueled inflationary pressure, which was partly responsible for the erosion of bank capital.

The cost of nonperforming loans is significant for taxpayers and depositors in numerous countries, and especially in the ones which were confronted with balance of payments crises and fiscal deficits. The rise of nonperforming loans led to a deterioration of bank assets and erosion of their capital. In the short run, numerous banks facing liquidity problems resorted to short-term financing in the form of interbank loans. However, the high cost of these loans further exacerbated the banking crisis. In a number of countries, it shifted bank lending incentives toward imprudently high-risk alternatives, and hence increased runs on banks and direct losses to depositors in the absence of a deposit insurance scheme.

While the intermediation functions played by well-managed banks can be a source of investment and economic growth, the deterioration of banks and financial systems illustrated notably by the rise of credit risks and bank failures has tremendous economic and welfare implications for governments and households alike. At the governmental level, it poses serious challenges to the pursuit of macroeconomic stability and growth objectives, especially in the context of a narrow tax base and growing fiscal deficits. The reduction of disposable income following direct losses to depositors in the absence of insurance guarantee mechanisms can contribute to a rapid deterioration of welfare, especially when per capita income is already low and poverty is widespread. Future research will investigate the welfare implications of banking and financial crises in Sub-Saharan Africa, and the direction of causality between balance of payments and banking crises, especially in the sub-panel of CFA countries, which suffered balance of payments and banking crises in the 1990s.

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