## Impact of Conflict and Political Instability on Banking Crises in Developing Economies

_IMF Blog, July 29, 2020_

## Source details

**Canonical URL:** [Impact of Conflict and Political Instability on Banking Crises in Developing Economies](https://www.imf.org/en/blogs/articles/2020/07/29/impact-of-conflict-and-political-instability-on-banking-crises-in-developing-economies)

## Other formats

- [Markdown version](/en/blogs/articles/2020/07/29/impact-of-conflict-and-political-instability-on-banking-crises-in-developing-economies/index.md)
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## Bibliographic details
- Authors: Montfort Mlachila, Rasmane Ouedraogo
- Published: July 29, 2020

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### Scope and data
- Study covers systemic banking crisis occurrence in 92 developing countries over the period 1970-2016.
- Focus: whether rising conflict and political instability globally over the past several decades has led to more banking crises in developing countries.

### Key quantitative findings
- The odds of a banking crisis are 2.5 times greater when a country is affected by a conflict.
- The probability of experiencing a banking crisis is 25 percent when the conflict lasts 10 years, against 16.4 percent when it lasts two years.
- Major waves of conflict tend to be associated with a higher rate of occurrence of banking crises (as illustrated by the study’s chart relating number of countries in banking crises and in conflict).

### Empirical examples
- Sierra Leone civil war (1991-2002): more than 40 percent of banking system loans were nonperforming and the license of one bank was suspended in 1994.
- Central African Republic (outbreak of conflict in 2013): bank nonperforming loans increased to more than one-third of total loans and some banks became undercapitalized.

### Transmission channels and mechanisms
- Primary channel of transmission: occurrence of fiscal crises following a conflict or political instability.
- Mechanisms described:
  - Conflicts and political instability negatively affect the productive capacity of a country.
  - Reduced productive capacity can reduce government revenue.
  - Increased unproductive spending, including military expenditures, can follow.
  - Resulting fiscal crises can lead to government dysfunctionality and weakening of institutions, increasing banking system vulnerability.
- Cross-border spillovers: conflicts and political instability in neighboring countries increase the likelihood of banking crises in a given country.

### Policy implications and recommendations
- Governments facing conflict and/or political instability need to address their root causes and try to mitigate their negative effects with the appropriate design and implementation of economic policies.
- Creating adequate fiscal space in normal times can reduce the likelihood of fiscal crises and in turn lower the probability of systemic banking crises.
- Policymakers should pay attention to conflicts in neighboring countries even if they themselves are not conflict-afflicted, since their banking systems may suffer negative spillovers from neighbors given that banks operate across borders.

_Impact of Conflict and Political Instability on Banking Crises in Developing Economies — Montfort Mlachila, Rasmane Ouedraogo; July 29, 2020 (IMFBlog)_

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## References

- [Our IMF staff paper](https://www.imf.org/en/Publications/WP/Issues/2020/02/28/The-Impact-of-Conflict-and-Political-Instability-on-Banking-Crises-in-Developing-Countries-49047)

_Source: https://www.imf.org/en/blogs/articles/2020/07/29/impact-of-conflict-and-political-instability-on-banking-crises-in-developing-economies_