Effects of information sharing on banking credit and economic growth in developing countries: Evidence from the West African Economic and Monetary Union

• Author: Salamata Loaba,Pam Zahonogo
• Published date: 01 July 2019
• Date: 01 July 2019
• DOI: http://doi.org/10.1002/ijfe.1706

RESEARCH ARTICLE

Effects of information sharing on banking credit and

economic growth in developing countries: Evidence from

the West African Economic and Monetary Union

Salamata Loaba | Pam Zahonogo

Department of Economics, University of

Ouaga II, Ouagadougou 03, Burkina Faso

Correspondence

Salamata Loaba, University of Ouaga II,

03 BP 7164, Ouaga 03 Burkina Faso.

Email: loabasali@gmail.com

JEL Classification: G20; G29; D82; O47

Abstract

This article aims to analysethe information sharing effect on bank credit and eco-

nomic growth in West African Economic and Monetary Union. A simultaneous

model was tested on panel data covering the period of 2005–2015. Using the

credit register cover, the results found by the two‐stage least square and three‐

stage least square methods indicate that high informationsharing does not result

in obviously high bank credit and economic growth. However, results also show

a nonlinear relationship between information sharing and banking credit and a

nonlinear relationship between information sharing and economic growth. The

results show the necessity for promoting information sharing structures.

KEYWORDS

banking credit,economic growth, informationsharing, credit register cover,simultaneous equations,

three‐stage least square

1|INTRODUCTION

Information sharing has inspired theoretical and empiri-

cal literature. Based on theories, the results conclude that

information sharing reduces the phenomena of adverse

selections and moral hazards. Pagano and Jappelli

(1993) show that information sharing reduces adverse

selection in the credit market. In fact, before giving a

loan, a bank must perform a diagnostic test based on

the information treatment. The disposal of information

regarding the borrowers can be retained in asymmetric

ways between banks. Some banks retain more informa-

tion on a borrower's group than other banks. Information

sharing eliminates the differences in information and can

help banks better evaluate loan risks. Moreover, it also

helps banks to better allocate resources by selecting pro-

jects that are less risky. For the authors, the information

sharing effect on increasing credit is still ambiguous

because the increase in the credit for borrowers in good

standing is negated by a credit reduction given to

borrowers in bad standing. Jappelli and Pagano (2002)

also indicate that information sharing increases funding

and reduces standard credit drawbacks.

Padilla and Pagano (1997) argue that the information

sharing effect reduces a bank's market power and moral

hazard. For these authors, the informational rents

retained by banks lead to higher interest rates on credit.

By sharing information, the banks' informational rents

are reduced, which leads to a reduction in the moral

hazard and standard drawbacks. In addition, Vercammen

(1995) and Padilla and Pagano (2000) support this conclu-

sion by showing that information sharing creates a disci-

plined effect. The information on borrower drawback

repayments is a signal that makes it difficult to obtain

new credit. Borrowers reduce their opportunistic behav-

iours by giving additional effort in the realization of their

project. The effort that is given leads to the renewal of the

funding and to a future credit increase for new borrowers.

Less moral hazard reduces borrowers' excessive indebted-

ness risks (Bennardo, Pagano, & Piccolo, 2008) and

Received: 1 June 2018 Revised: 27 July 2018 Accepted: 10 September 2018

DOI: 10.1002/ijfe.1706

Int J Fin Econ. 2019;24:1079–1090. © 2018 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/ijfe 1079