Regulatory Quality, Economic Policy Uncertainty, and Loan Performance in a Fragile Financial System: Evidence from Sub-Saharan Africa Contexts

This paper is an investigation into the degree to which regulatory quality and economic policy uncertainty influence loan performance in 15 Sub-Saharan African countries. The data for the study were drawn from the International Monetary Fund (IMF), World Bank and Federal Reserve Bank of St. Louis, covering the period 2008Q1–2024Q4. Using quarterly panel data, we employ a Panel autoregressive distributed lag (PARDL) with the addition of a Quantile ARDL (QARDL) approach to account for non-homogeneous effects of different levels of non-performing loans. Empirical feedback reveals that sound and effective regulatory quality substantially reduces non-performing loans, most especially in fragile financial regimes. Also, it was established that monetary and fiscal and economic policy uncertainty always enhances non-performing loans, especially during stress conditions, and this is an indication of the asymmetric state-dependent nature of the policy risk in the weak banking systems. The study concludes that increasing the quality of the regulatory system should be a key objective of financial sector reforms in Sub Saharan Africa (SSA). In addition, there is a need for regional coordination, such as regulatory harmonization and policy signalling, between countries in SSA, to reduce cross-border spillover effects and increase financial stability in a more interdependent financial system.