The Effect of Banking Sector Efficiency on the Economic Development in West Africa

Abstract

West African countries' financial systems are weak and underdeveloped. The financial markets in most countries are controlled by banks. The banking sector accounts for more than 100 banks that hold approximately 90% of the financial system’s total assets according to the International Monetary Fund (2016). The banking sector in the young continent is relatively weak and very concentrated compared to other emerging economies because five major banks detain 50% of bank assets. In addition, many companies from different sectors find access to financing very difficult in the region. Indeed, this phenomenon slows economic activities, impacting the growth adversely. Unlike most developed economies, the financial system in most African countries is based on a banking system. Therefore, any systematic risk of failures will damage the entire financial system. Banking institutions in West Africa are very liquid and well-capitalized. However, the rate of credit to private sectors is far below the global average. Businesses and enterprises have financing barriers compared to their peers in other emerging countries in Asia.The role of banks in the economy is primordial in any country of the world, specifically in West Africa where the entire financial system is controlled by them. Therefore, some researches have been conducted about the impact of the banking sector on a country’s development. This study will consist of analyzing the banking sector in West Africa, the effect of regulation, the challenges facing banks, and opportunities to develop an effective financial market in this region of the world. The primary goal of this research is to analyze whether the financial efficiency of the banking sector in the Economic Community of West African States region estimated by some financial indicators as Return on Asset (ROA), Return on Equity (ROE) and Net Interest Income (NIM) affects the economic development represented by the Gross Domestic Product (GDP) growth rate.