How does the institutional framework affect bank financing in the private sector? Empirical evidence from West African economic and monetary union
Clémence Mianseli Ouali, Windinkonté SéogoPurpose
This study analyzes how the institutional framework affects bank financing in the private sector of the West African Economic and Monetary Union (WAEMU).
Design/methodology/approach
The analysis is based on a panel of 68 banks in 7 countries of the union, over the period 2000–2022. The dynamic method cross-sectional autoregressive distributed lag (CS-ARDL) is used to assess the combined effect of prudential standards of the Central Bank of West African States (BCEAO) and World Bank governance on bank financing of the private sector.
Findings
The results show that the institutional framework influences private-sector bank lending primarily through prudential regulation. The transformation ratio exhibits the most stable and significant association across all specifications, reflecting banks' ability to convert short-term funds into long-term financing. The solvency ratio is also positively and significantly associated with credit, consistent with the bank capital channel. The liquidity ratio becomes significant only when governance and prudential standards are considered jointly. Bank deposits and financial depth are also positively associated with credit. Governance shows no significant direct association with credit, although indirect, delayed or conditional effects cannot be ruled out.
Research limitations/implications
One limitation of this study is that it does not explicitly account for banks' trade-offs between financing the private sector and holding government securities. This issue is important for the analysis of bank financing in the WAEMU, as the literature suggests that increased exposure to sovereign securities may be associated with reduced credit availability to the private sector, with some studies identifying a threshold beyond which this relationship becomes adverse. Future research could incorporate data on banks' exposure to government securities to examine how the institutional framework and prudential standards are associated with the allocation of resources between these two asset classes.
Practical implications
Three implications follow directly from the results. Regarding bank capitalization, the BCEAO should maintain a gradual and predictable path for tightening prudential requirements, allowing banks to adjust their credit policies without abrupt contraction. Regarding liquidity, since its effect is only identifiable when the institutional framework is considered as a whole, liquidity supervision would benefit from being coordinated with the monitoring of other prudential dimensions rather than treated in isolation; authorities could explore mechanisms that incentivize banks to channel a larger share of their excess liquidity toward financing the private sector. Finally, policies promoting longer maturities for bank funding would serve as a direct lever for supporting private-sector credit.
Social implications
From a societal perspective, improving the flow of credit to small and medium enterprises (SMEs) and the informal sector, which together account for more than 80% of employment in the WAEMU, would foster productive investment, job creation and financial inclusion. The prudential channels highlighted in this study, particularly capitalization and resource transformation, thus appear to be relevant levers for supporting this dynamic, even though the present analysis does not allow for a direct measurement of their impact on end beneficiaries. These findings are particularly significant in a context where these sectors account for the majority of regional employment.
Originality/value
While existing studies on the WAEMU rarely examine either governance or prudential regulation within the same econometric specification, this study contributes by jointly integrating these two dimensions of the institutional framework without aggregating them into a single composite indicator at the individual bank level. It thus provides new empirical insights into how institutional quality translates into bank financing of the private sector in a regional context where these two dimensions remain understudied in combination.