Abstract
This paper provides an empirical assessment of the relationship between the structure of the banking market and the cost of credit in the WAEMU. The analysis focuses on WAEMU countries except for Guinea-Bissau due to the lack of sufficiently long series. The study covers the period from 1996 to 2017. Using the fully modified ordinary least squares (FMOLS) method, we show that the banking market concentration ratio has a double effect on the cost of credit. First, the concentration ratio increases the cost of credit, and second, it decreases the cost of credit after reaching a threshold of 70 percent. Moreover, the results highlight the positive impact of the money market interest rate on the cost of credit. On the other hand, the inflation rate unexpectedly lowers the cost of credit in the WAEMU.
Highlights
Financing is an important pillar of any economic activity
The study is based on the fully modified ordinary least squares (FMOLS) estimator developed by Pedroni (1996) and Philips and Moon (1999)
It is noted that the bank concentration ratio (CR3) and the money market rate (MMR) positively affect the cost of bank lending, while the concentration squared ratio (CR32), the credit supply (CREDIT) and the inflation rate (INF) negatively affect the cost of credit
Summary
Financing is an important pillar of any economic activity. In the absence of adequate financing, the investment needs of companies are not covered. In the absence of competition, large and well-established banks in the banking market can offer lower interest rates to their customer’s thanks to economies of scale, attracting young companies In this sense, Diagne (2011) finds that access to finance for small firms has remained very low despite the entry of several new banks into the banking market in Senegal. Similar results were observed in the United States by Petersen and Rajan (1995) who concluded that increased competition in the local credit market is negatively associated with access to small business finance Overall, this brief review shows that the structure of the market influences the cost of bank http://ibr.ccsenet.org
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