Short-Versus Long-Term Credit and Economic Performance

This paper studies the link between financial development and economic growth in the West African Economic and Monetary Union (WAEMU). Using panel data for WAEMU countries over the period 1995-2006, the results suggest that while financial development does support growth in the region, long-term bank financing has a greater impact on economic growth than short-term financing because long-term projects have higher returns adjusted for risks. Given that in the WAEMU short-term credit accounts for about 70 percent of credit to the private sector, WAEMU countries are less able to reap the full benefits of improvements in their financial systems. The results also highlight the importance of macroeconomic stability, a creditor-friendly environment, political stability, and the availability of long-term financial resources in fostering banks’ supply of long-term loans.Bank credit;Banking sector;Credit risk;Economic growth;Economic models;Excess liquidity;Financial incentives;Human capital;West African Economic and Monetary Union;banking, gdp per capita, real gdp, gdp growth, bank financing, banking system, bank assets, return on assets, macroeconomic stability, return on equity, bank liquidity, banking systems, liquidity ratio, gdp growth rate, working capital, growth rate, gross domestic product, capital formation, banking supervision, bank regulation, large public enterprises, bank regulator, current expenditure, bank research, growth model, bank loan, bank relationship, time deposit, banking services, bank lending, bank portfolios, bank profitability, bank policy, net interest margin, banking regulation, banking license, banking operations, per capita income, nonperforming loan, banking institutions, bankable projects, credit risk management, bankers, government current expenditure, banking distress, banking crisis