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

Abstract

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 financial indicators as Return on Asset (ROA), Return on Equity (ROE) and Net Interest Income (NIM) affects the economic development measured by the Gross Domestic Product (GDP) growth. The choice of these profitability and rentability variables is inspired by the World Bank’s indicators of financial institutions efficiency at country level. This research investigated the impact of banking sector efficiency on the economic development in country members of the Economic Community of West African States (ECOWAS) from 2010 to 2019. This study uses quantitative methodology in order to attain the main objective. The research proposes to develop a methodology, through theoretical study as well as making use of related literatures, which can be used in determining the impact of banking sector performance and economic development in West African region. The required data can be classified into two main categories: the factors that determine bank efficiency, and the economic indicator that explains growth in the region. The goal is to analyze whether the financial efficiency of banks lead to growth in the economies of countries. In our model, the banking sector efficiency measured by financial indicators as ROA, ROE, and NIM indicates the explanatory variables while annual growth rate of GDP for economic development measures the predicted variable. The model uses Panel Generalized Method of Moment (GMM) to test the hypothesis from EVIEWS software. The result of our survey suggests that among all the explanatory variables only the return on asset (ROA) has statistically significant influence on the gross domestic product (GDP) growth rate meaning that the banking sector financial performance measured by ROA has significant impact on the economic growth in West Africa. The research shows that the main actors in banking sector and authorities should focus on the efficiency of banking system in order to drive a sustainable economic growth. In addition, this research obviously provides some important information to researchers, governments, financial analysts, banking policy makers and supervisory authorities