Derivatives use and the business lending efficiency of African banks

TLDR: The authors studied a panel of 147 banks from 14 African countries between 2011 and 2017, using two competing non-parametric and parametric approaches for efficiency analysis and found that despite conflicting bank efficiency interpretations, both investigations corroborate the existence of widespread inefficiency of markets in Africa, which is likely strengthened by harmful fragmentation in the continent's financial/capital markets, market illiquidity, a lack of transparency, and informational inefficiency.

Abstract: Abstract Sparked by the ongoing advocacy for Africa’s derivatives initiatives, this work seeks to uncover the linkage between derivatives use and the business lending efficiency of banks in selected African economies. We studied a panel of 147 banks from 14 African countries between 2011 and 2017, using two competing non-parametric and parametric approaches for efficiency analysis. Respectively, Simar and Wilson’s (2007) two-stage double-bootstrap techniques (non-parametric) and an ML-based Bayesian SFA model (parametric) reflect the desired dynamic (instead of static) efficiency representations for panel analyses. Despite conflicting bank efficiency interpretations, both investigations corroborate the existence of widespread inefficiency of markets in Africa, which is likely strengthened by harmful fragmentation in the continent’s financial/capital markets, market illiquidity, a lack of transparency, and informational inefficiency, among others.