Loan Defaults in Africa

African financial deepening is beset by a high rate of loan defaults, which encourages banks to hold liquid assets instead of lending. We put forward a novel theoretical model that captures the salient features of African credit markets which shows that equilibrium with high loan defaults and low lending can arise when contract enforcement institutions are weak, investment opportunities are relatively scarce and information imperfections abound. We provide evidence using a panel of 110 banks from 29 African countries which corroborates our theoretical predictions.