Bank Competition, Interest Rates and Access to Finance in the WAEMU

Did bank market entry in West African Economic and Monetary Union (WAEMU) markets since 1995 lower the cost of and increase access to banking services for firms and individuals? While greater competition is generally associated with lower prices and higher output, the effect of competition on bank interest rates and access to credit is ambiguous in theory, especially in poor information environments. In the WAEMU, bank concentration fell in most countries but the stability of net interest margins does not indicate a reduction in bank market power or higher efficiency. Similarly, Central Bank data on interest rates on new deposits and loans show that, in the countries where there was more market entry, SMEs did not experience lower interest rates on loans or higher deposit interest rates. Large firms, however, appear to have benefited from more favorable prices for bank services. Evidence from a panel dataset of firms from the World Bank enterprise survey for Senegal (where the number of banks increased markedly) shows that access to short‐term bank credit expanded for medium and large firms, but not micro‐enterprises, which remain unbanked. Overall, taking into account all loans, fewer SMEs had loans or credit lines from a financial institution in 2006 than in 2003; also, loan collateral ratios increased. The failure of competition to improve access to finance for small firms is consistent with the view that bank competition does not promote relationship lending