Institutional Framework and Banking Efficiency in Sub-Saharan Africa: Evidence from CEMAC and UEMOA Countries

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Applying the Stochastic Frontier Approach (SFA) to a translog production function, we investigate the influence of environment on banking efficiency in UEMOA and CEMAC zones, by introducing macroeconomic and the legal framework variables in defining the common frontier. We find that on their respective regional frontiers, banks are efficient in UEMOA and CEMAC even if they can perform better. For UEMOA countries, banks efficiency in terms of lending is more related to their management methods. Banks within the area operate in a homogeneous environment. Concerning the CEMAC, our results suggest that countries are heterogeneous within the zone. On a common frontier, in terms of lending the UEMOA banks are more efficient than CEMAC ones. The impact of the environment on efficiency is more important in CEMAC countries. Overall, macroeconomic conditions and the quality of institutions determine banking efficiency in UEMOA and CEMAC. The income, the index for enforcement of contracts, and the strength of legal rights index, are associated with an increase in credit production when their levels are high. Conversely, the financial development, and the regulatory quality tend to increase credit production in countries where their levels are weak.

Author(s):

Arnaud Tamini    
LaRGE Research Center (University of Strasbourg)
France