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Periodical article Periodical article Leiden University catalogue Leiden University catalogue WorldCat catalogue WorldCat
Title:Foreign Creditors' Perception of Risks in Lending to African Countries: Evidence from Interest-Rate Spread
Author:Odedokun, M.O.ISNI
Year:1996
Periodical:Development Policy Review
Volume:14
Issue:4
Period:December
Pages:391-408
Language:English
Geographic term:Africa
Subjects:external debt
foreign investments
international relations
Economics and Trade
External link:https://doi.org/10.1111/j.1467-7679.1996.tb00115.x
Abstract:The traditional practice in international financial markets is for commercial creditors to charge borrowers in developing countries the prevailing interest rate plus a risk premium. But if the risk is perceived to be too high no loan will be forthcoming. The present study analyses the factors which affect the reaction functions of foreign creditors, and the country characteristics that make them charge some African countries higher spreads above the market rate of interest than others. The study employs annual data for 39 African countries during the period 1980-1993. A regression equation was run with the interest-rate spread (i.e. the rate charged above the risk-free market rate) as the dependent variable and various aggregate economic indicators 'suspected' of being what lenders may take into account as risk factors as the regressors. The following variables were tested for: existing debt overhang, debt-service ratios, external reserves position, preponderance of variable interest in toal debt, external trade ratios, terms-of-trade movements, economic growth, other domestic economic indicators (investment-GDP ratio, government-GDP ratio, inflation), maturity of loans, and a number of other economic and noneconomic factors, including political stability. Bibliogr., notes.
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