Foreign Investment in Colombia’s Financial Sector

IMF Working Papers, November 1, 1999

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Study analyzes foreign investment in Colombia’s financial system, chronicles major changes in legislation, describes how investment flows evolved over time, and compares performance of foreign–owned versus domestic banks.
Panel data estimations are used to assess effects of financial liberalization and foreign entry.

Financial liberalization in general had a beneficial impact on bank behavior in Colombia.
Foreign (and domestic) entry beginning in 1990 improved bank behavior by enhancing operative efficiency and competition.
The positive contribution of foreign entry may be overstated in recent studies that do not control for other liberalization factors.
Improvements in efficiency and competition came at the expense of a deterioration in the loan quality of domestic banks.

Uses panel data estimations to evaluate the impact of liberalization and entry on bank behavior.
Compares performance of foreign–owned versus domestic banks over the liberalization period.

Operative efficiency: foreign and domestic entry starting in 1990 led to enhanced operative efficiency.
Competition: entry increased competition among banks.
Loan quality: domestic banks experienced a deterioration in loan quality (nonperforming loans) as entry and liberalization progressed.

Subjects: Balance of payments, Banking, Commercial banks, Financial institutions, Foreign banks, Foreign direct investment, Loans, Nonperforming loans
Keywords: bank behavior, bank ownership, banking system, banks interest rate payment, banks spread, Colombia, Commercial banks, domestic bank, financial liberalization, foreign bank, Foreign banks, Foreign direct investment, Foreign investment, Loans, market share, maximization model, Nonperforming loans, ownership bank, WP