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Archives of Business Research – Vol. 10, No. 2

Publication Date: February 25, 2022

DOI:10.14738/abr.102.11903. Valery, M. G., Roland, N. N., & Messomo, E. S. (2022). Determinants of Financial Intermediation: Empirical Evidence from

Cameroonian Commercial Banks. Archives of Business Research, 10(02). 287-300.

Services for Science and Education – United Kingdom

Determinants of Financial Intermediation: Empirical Evidence

from Cameroonian Commercial Banks

Moutie Giscard Valery

Assitant lecturer at the University of Buea

Department of Banking and Finance

Ntomane Ntomane Roland

Ph.D student, Banking and Finance, University of Buea

MESSOMO Elle Serge

Associate Professor, University of Buea

HOD Department of Banking and Finance

ABSTRACT

Purpose: The purpose of this paper is to identify the explanatory factors of financial

intermediation (FI) in Cameroon. Methodology: To achieve this objective, we used

secondary source data from the National Council of Credit and World Development

Indicator databases covering the period 1977-2016. This analysis applies the

Ordinary Least Square method on three multiple linear regressions that emphasize

the determinants of FI over the components of FI. Findings: The results show that

the interest rate on deposits positively affects FIs through credit and money supply

and negatively through the intermediation margin. The expected inflation rate

positively influences FI via the intermediation margin and negatively via credit and

money supply. The interest rate on loans and the required reserves are directly

linked to the components of FI (money supply and intermediation margin).

Implications: Consequently, banks must take these determinants into account in

order to consolidate their management system on the one hand and, on the other

hand, to ensure their credibility as well as their sustainability. Originality: Several

studies have focused on the determinants of financial intermediation. However,

none has simultaneously used the three measures of financial. Intermediation:

credit and money supply and the intermediation margin. Moreover, this study is the

first to highlight the determinants of financial intermediation in Cameroon.

Keywords: Financial Intermediation, Bank, Credit, Monetary mass, Intermediation

margin.

INTRODUCTION

The banking landscape of the countries of the Economic and Monetary Community of Central

Africa (CEMAC) has undergone profound changes over the past two decades. These changes

follow on from the financial liberalization policies implemented gradually from October 1989.

1980s, to improve the financial situation of banks and improve the legal and regulatory

framework of the financial system. Since then, the banks of this Economic Union have seen their

financial situation improved. Efforts made in the context of financial reforms have been

motivated by the idea that financial liberalization, by improving the efficiency of financial

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Archives of Business Research (ABR) Vol. 10, Issue 2, February-2022

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intermediation, will allow more sustained economic growth. The banking sector has indeed a

particular influence in economic activity in the sense that improving its efficiency is a key factor

for economic development (Bagehot, 1873; Schumpeter, 1911). Following financial

liberalization, several financial institutions were created in Cameroon like MC2 and MUFFA, the

aim being to integrate the poor who were excluded from the traditional banking system.

Indeed, the development of financial intermediation makes it possible to mobilize enough

available savings to support economic activity in a country. This relationship can be explained

by two channels. First, financial intermediaries reduce the information costs of external

financing thereby promoting the cost of borrowing. Second, they reduce the information

asymmetry between borrowers and lenders through the innovation of financial products that

minimize the risks associated with credit activities.

For several decades, many studies have analyzed the relationship between the development of

finance and economic development. To this end, the empirical literature recognizes the work

of Goldsmith (1955, 1969) and Gurley and Shaw (1955, 1960) as being the first. In addition,

under the impetus of authors such as Gurley and Shaw (1967), McKinnon (1973, 1991) and

Shaw (1973), the study of the relationship between finance and economic development has

deepened. Although the role of financial intermediation in the economic sphere has attracted

the attention of several empirical works, it remains to be specified that the analysis of the

determinants of financial intermediation in developing countries in general and in Cameroon

in particular did not receive the same attention. Hence the purpose of this study is to fill this

gap by examining the determinants of financial intermediation by highlighting the case of

Cameroonian commercial banks.

This paper is structured in seven sections. In addition to the introduction which constitutes the

first section, the second section is devoted to the theoretical literature. Section three presents

the dominant theory of financial intermediation. The methodological approach is the subject of

section four. Sections 5 and 6 present the results and section seven concludes the study.

FACTOR ROLE AND THEORETICAL RELEVANCE OF FINANCIAL INTERMEDIATION

The theory of financial liberalization and that of financial intermediation are the main theories

that dominate the literature on financial development.

According to the work of Biales (2006), an activity through which an institution acquires

financial credits and, simultaneously, contracts commitments for its own account via financial

transactions on the market is qualified as financial intermediation. Financial intermediation has

several characteristics, the most important of which are: i) It is based on two bilateral

relationships: on the one hand between the financial intermediary and the source of financing

and on the other hand between the financial intermediary and the borrower (non-financial

agent); ii) It supposes individual exchanges of information whereas at the level of market

information, it is collective and iii) the intermediation rate which measures the share of

financing provided by financial agents as a ratio of the finances of which benefit non-financial

agents (Gurley and Shaw, 1967). In addition, two types of intermediation have historically

existed: one in the broad sense and the other in the strict sense. The first approach, also called

the financing offer, represents all the loans granted to non-financial agents by all the financial

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Valery, M. G., Roland, N. N., & Messomo, E. S. (2022). Determinants of Financial Intermediation: Empirical Evidence from Cameroonian Commercial

Banks. Archives of Business Research, 10(02). 287-300.

URL: http://dx.doi.org/10.14738/abr.102.11903

institutions. The second approach, also called request for financing, favors the choice made by

the requester in favor of recourse to financial intermediaries (Leland and Pyle, 1997).

Financial intermediaries allocate credits or invest in capital, thereby increasing the productive

potentialities of the economy (Rother, 1999). Several factors affect the total level of financial

intermediation. According to Rother, these factors are classified into two categories: supply and

demand factors. Supply factors include: the interest rate incurred, expected inflation, the level

of performing loans, adequate capital ratios, minimum reserves requirements, the provision of

property rights and the concentration ratio. Demand factors, on the other hand, relate to

wealth, credit interest rates and past inflation costs. Mckinnon (1973) notes that the influence

of price stability is a necessary condition for the development process. Inflation discourages

long-term credit because it increases information problems and moral uncertainty in the

banking sector. To this end, for an efficient financial intermediation process, inflation must be

under control. Several variables influence the process of financial intermediation. Rother

(1999) identifies the following: the interest rate (interest rate spread), expected inflation, the

level of non-performing credit, the capital adequacy ratio, the minimum reserve or

international liquidity held by the central bank (minimum reserve requirements), the

provisions of property rights, the concentration ratio, wealth, the deposit interest rate and past

inflation costs. Theoretically, only interest rate variables have ambiguous effects on financial

intermediation Rother (1999). This ambiguity depends on the weight of the price elasticities on

the supply and demand functions. Given the availability of data, only the determining variables

such as interest rate (ispr), deposits interest rate (idr), expected inflation (ein) and minimum

reserves requirements (mr) will be used. Appropriate econometric techniques and the

necessary data transformations will be used for the estimations.

EMPIRICAL OF LITERATURE

According to the existing literature, financial intermediation has three variables, namely, short,

medium and long term credits (Ccmlt), money supply (M2) and financial intermediation margin

(Mi). Indeed, the main contribution of the financial system to growth lies in the fact that it

provides an efficient and scalable payments system that mobilizes savings and improves their

allocation to investment through positive real interest rates. This assumption is also present in

the models of financial liberalization developed by Mckinnon (1973) and Shaw (1973). These

models estimate that the level of domestic investment can be increased by stimulating the

accumulation of savings, which leads to greater credit allocation. The two aggregates, money

and credit, are linked by the balance sheet constraint of the bank and are therefore strongly

collinear. Empirically, we find that money (M1 or M2) responds immediately to a monetary

policy restriction by contracting and credits react later by decreasing at the same time as output

(Bernanke, 1993). Finally, financial intermediation cannot be studied without taking into

account the operating results of the main players, such as the money-creating banks. In fact,

bank profits are the source of the increase in the activity of banks. The more profits they make,

the better they become Shaw (1973).

Apart from the work of Rother (1999), Mckinnon and Shaw (1973) and Green and Villanueva

(1973), very little empirical work exists on the determinants of financial intermediation on

banks in general and on those of Cameroon in particular, hence the interest of our study. The

interest rate on loans, the deposits interest rate, the expected inflation rate and the minimum

reserves determine the FI. Based on the work of Rother (1999), the interest rate on loans, for