Capital, risk and profitability of WAEMU banks: Does bank ownership matter?

We investigate the simultaneous relationship among bank capital, risk and profitability, taking into account bank ownership and the emergence of Pan-African cross-border banks. We specify a simultaneous equation model and estimate it using hand-collected bank level data from all West African Economic and Monetary Union (WAEMU) countries for 2000-2014. We split the countries into lower middle-income (LMICs) and low-income (LICs) according to the World Bank classification. We uncover evidence that the sensitivity of bank profitability to an increase in capital ratio is twice as high in LMICs (+0.10) as in LICs (+0.05). Moreover, we find that bank capital positions tend to be countercyclical in LICs, mimicking a key postulate of Basel III. After differentiating between cross-border Pan-African banks and foreign banks from outside the continent, we find that the overall effect of bank ownership on risk depends on the origin of banks (French versus Pan-African). These findings are robust to alternative estimation techniques and the use of alternative measures of risk and profitability.

Kanga, D., Murinde V., and Soumare I. (2019) Capital, risk and profitability of WAEMU banks: Does bank ownership matter?. Working Paper SOAS Centre for Global Finance .