Foreign Banks in Poor Countries: Theory and Evidence

IMF Working Papers, January 1, 2006

Source details

Examines how foreign bank penetration affects financial sector development in poor countries.
Combines a theoretical model with empirical cross-sectional and panel tests.
Focus subjects: Bank credit; Banking; Commercial banks; Credit; Financial institutions; Financial markets; Financial sector development; Foreign banks; Money.

Theoretical model assumptions and mechanism:
- When foreign banks are better at monitoring high-end customers than domestic banks, their entry benefits those high-end customers but may harm other customers.
- Foreign bank entry can worsen overall welfare under these conditions.
Model prediction:
- Credit to the private sector should be lower in countries with more foreign bank penetration.

Main empirical associations in poor countries:
- A stronger foreign bank presence is robustly associated with less credit to the private sector in both cross-sectional and panel tests.
- In countries with more foreign bank penetration, credit growth is slower.
- In countries with more foreign bank penetration, there is less access to credit.
Findings for advanced countries:
- No adverse effects of foreign bank presence are found in more advanced countries.

assets in the country; bank assets; bank assets in bank; bank consolidation; Bank credit; bank entry; bank presence; Commercial banks; cost efficiency; Credit; Financial development; Financial sector development; foreign bank; foreign banks; low-income countries; market share; mismanaged bank privatization; Sub-Saharan Africa; WP

IMF Working Paper — Foreign Banks in Poor Countries: Theory and Evidence (Working Paper No. 2006/018).

_wp0618 — Change in Private Credit to GDP and Change in Foreign Bank Presence
- _wp0618 — Change in Private Credit to GDP and Change in Foreign Bank Presence (Markdown version)
- _wp0618 — Change in Private Credit to GDP and Change in Foreign Bank Presence (PDF)