How has the rise of Pan-African banks impacted bank stability in WAEMU?

Abstract

We investigate the impact of the recent rise of Pan-African banks, which are indigenous African banks with cross-border networks, on banking sector stability within the West African Economic and Monetary Union (WAEMU). We contextualise this problem in terms of the long-standing unresolved controversy in the banking literature, between the competition-stability hypothesis and the competition-fragility hypothesis. We test the hypotheses using hand-collected bank-level data from all WAEMU countries for 2000–2017. We uncover new evidence that the increase in competition, engendered by the entry of Pan-African banks, is associated with an increase in banking stability as well as an increase in banking fragility – it all depends on the origin of banks in WAEMU. Specifically, the expansion of Pan-African banks into the WAEMU banking system is consistent with the competition-fragility hypothesis, while the presence of French banks in WAEMU supports both hypotheses. Overall, bank profit is the main mechanism through which competition is associated with an increase in banking fragility in WAEMU.