Re-examining the relationship between banking efficiency and economic growth: Evidence from Cameroon

This study is conducted to explore the extent of the relationship between banking efficiency and economic growth in Cameroon using time series data from 2000 to 2019. The urgent need to carry out this investigation stem from the fact that banking sector efficiency contributes to a significant share of financial development and economic growth in Cameroon while the capital market is less developed. We use GDP as dependent variable and three explanatory variables (ROA, ROE and NIM,) and a control variable (RGQ). In the purpose of carrying out our main estimation, the study uses the FMOLS estimation techniques. The unit root test employed in this study is the Augmented Dicker Fuller (ADF) and Phillips-Perron (PP) unit root test to check the stationarity of the parameters and the Johansen cointegration test was carried out to check the cointegration among the variables. Therefore, the banking sector is more important in Cameroon than in developed nations because the health of the financial system in this region rely on the efficiency level of banking institutions. The results reveal that banking efficiency has a significant positive long run relationship with economic growth in Cameroon over the period under review. Further outcome suggest that a unit change in ROA ratio account for 1.23% positive change in economic growth through the effect on GDP with. Also, a percentage increase in ROE causes a 0.096% increase in GDP. The findings further suggest a positive long run relationship that exist between NIM and GDP (2.33% increase in GDP when NIM increases by 1 unit) and an improvement in RGQ causes a 0.56% increase in GDP. These results were confirmed in the robustness checks by using the same variables on a different empirical approach (DOLS technique). We also carried VAR granger causality test and the results revealed a unidirectional relationship between ROA and GDP and between ROE and GDP. Similar causality was also found between NIM and GDP and between RGQ and GDP. These results are consistent with prior studies and confirm the two theories that are employed to support this study (agency theory and neoclassical theory). The study concludes with policy recommendations to the government and other stakeholders and suggestions for future studies.