The economies of African countries are generally characterized by inefficient management of resources, strong heterogeneity in the rate of economic growth, as well as high levels of corruption and embezzlement of public funds, clearly highlighting the need to consider the role of government in the performance of the economic environment. Corruption is characterized by three key behaviors—bribery, embezzlement, and nepotism—characteristics that can influence the performance of any financial system. The objective is to examine the effect of corruption on credit risk in Angola. The result of the feasible generalized least squares (FGLS) estimation suggests that corruption increases non-performing loans in the Angolan economy; additionally, the authors find that the larger the bank's assets (bank size), the more averse to credit risk they become, and the smaller the state's stake in the banking system, the lower the non-performing loans.
TopIntroduction
The economies of African countries are generally characterized by inefficient resource management, strong heterogeneity in the rate of economic growth, as well as, high levels of corruption and embezzlement of public funds (Igharo et al., 2020; Kunieda, 2014; Sector et al., 2021). Corruption is defined as the use of public office for private gain (Bai et al., 2013; Jalles, 2016; Kunieda, 2014; Sector et al., 2021). Corruption is a problem that affects all economies, however, it is higher in poor countries, regardless of how it is calculated (Kunieda, 2014; Setor et al., 2021), therefore, Angola does not escape this reality.
Corruption causes negative effects on the financial performance of any organization (Van Vu et al., 2018). In the study conducted by Kunieda (2014) aiming to investigate the effect of capital account liberalization on corruption, the author found that more corrupt countries impose higher tax rates and thus, increase the negative impacts on economic growth. In parallel to this, Trabelsi and Trabelsi (2020) evidenced that both high levels of corruption and low levels of corruption can decrease economic growth.
Due to the poor access to credit in emerging countries, bribing banks or turning to relatives and friends to obtain financing has been the alternative solution found by entrepreneurs. Thus, corruption proves to be a strong barrier to entrepreneurship in emerging countries, mainly due to its ability to increase the cost of doing business (Hanoteau et al., 2021).
The economic reality of developing countries forces them to reconsider the role of governments in explaining economic performance (Jalles, 2016), since the personal interests of policymakers in the financial system cause distortions in the market, driving the inefficient allocation of resources. These include, for example, allocation of public resources to meet political needs or even personal interests (Huggard et al, 1993; Jalles, 2016), granting bank loans only to clients who belong to the party in power, appointing bank managers or financial institutions individuals because they belong to political affiliation and overlapping political objectives with the objectives of banking institutions.