The Impact of urbanization on banking development: Evidence from the West African Economic and Monetary Union (WAEMU)

Abstract

The paper aims to investigate the extent to which urbanization and industrialization affect bank development in the WAEMU (West African Economic and Monetary Union). To meet the goal of this study, we used the Pooled Mean Group (PMG) estimator, which requires long run coefficients to be similar but allows short run coefficients and error variances to fluctuate among groups. The sample of the study is composed of 7 countries, with Guinea-Bissau excluded, due to the absence of data on the period from 1980-2016. The results revealed that urbanization has a positive effect on banking development in the WAEMU. This intuitive relationship is linked to the fact that, as the urban population grows, the relative demand for financial services also grows. Also, industrialization has a good impact on banking development. In terms of policy implications, the study calls on governments to create the necessary conditions for successful urbanization to benefit the development of banks in the WAEMU zone.