Competition and banking efficiency in the WAEMU: The role of multinationals and institutions

Abstract

This paper analyzes the effect of competition on bank efficiency in the WAEMU, taking into account the role of multinational banks and institutional quality, using data on 141 banks from 2000 to 2019. Using Lerner then Boone indices as a proxy for competition, we apply the One-step procedure, then the 2SLS-IV to control for endogeneity, the Tobit to control for the censored dependent variable, and the GMM for robustness check. The results show that competition negatively affects bank efficiency according to the current environment and structure of the WAEMU banking system. However, this relationship between competition and efficiency is non-linear and subject to a high threshold of competition. Furthermore, the results show that multinational banks are generally less efficient but more resilient to competition due to their level of capitalization, their ability to invest in innovation, and their networks. The estimates also show that corruption and political instability reduce bank efficiency and reinforce the negative effect of competition on efficiency. The relevant authorities should continue to advocate for a better institutional and political environment to ensure that the WAEMU banking system moves toward a first order optimum.