Regulatory Quality and Banking Efficiency in Franc Zone Countries: An Analysis Based on the Data Envelopment Analysis Model

This study examines whether the quality of the regulatory environment affects the technical efficiency of banking systems in the Franc Zone, where two monetary unions (WAEMU and CEMAC) share a common currency arrangement and supranational banking supervision but differ in the quality of their national regulatory environments. Using a panel of the fifteen Franc Zone countries over 2000-2023, the technical efficiency of each national banking system is first estimated with an input-oriented Data Envelopment Analysis (DEA) model under variable returns to scale, and its determinants are then analysed with a fractional logit model with country fixed effects, suited to scores bounded between 0 and 1. Regulatory quality is measured by the World Bank's Worldwide Governance Indicators. Franc Zone banking systems operate on average at 68% of the best-practice frontier, which implies that the same outputs could be produced with about 32% fewer inputs. Regulatory quality has a positive average marginal effect on efficiency (0.125, p = 0.049), with diminishing returns: the effect is largest in countries with the weakest regulatory environments and fades as regulatory quality improves. This effect is moderate and loses significance in some robustness checks. Trade openness is associated with higher efficiency, whereas investment and human capital show weakly significant negative effects. The results suggest that improving the quality and credibility of the regulatory environment, rather than deregulation, can raise banking efficiency in the Franc Zone countries where regulation is weakest.