Assessing Macroeconomic Determinants of Banks’ Efficiency in the West African Monetary Zone

Abstract

Purpose: This study assesses how six selected macroeconomic variables, namely, size of the banking system, liquid liability of the system, interest rate, inflation, gross domestic product and exchange rate affect banking system efficiency in the West African Monetary Zone countries group. Spanning a twenty-nine-year period (1992 – 2020). Methodology: the study used fixed and random effect models of panel least squares to analyze the relationship between these macroeconomic variables and bank efficiency of the countries as a group. Further, the study analyzed the country-by-country net effect of the selected macroeconomic variables on bank efficiency. Findings: We find that when examined as a group, only the positive effect of exchange rate on bank efficiency is significant. We also find reveal that the macroeconomic variables have negative effect on bank efficiency in Gambia, Ghana and Sierra Leone while they positively affected bank efficiency in Guinea, Liberia and Nigeria. Finally, we find that interest rate and inflation have causal relationship with bank efficiency in the countries as a group. Unique Contribution to Theory, Practice and Policy (Recommendations: We advocate that bankers in the WAMZ critically appraise their size, liquidity and interest rates vis-à-vis their efficiency goal. We also recommend that the governments of Gambia, Ghana and Sierra Leone formulate bank friendly policies especially with respect to interest rates and inflation variables that have causal relationship with bank