Foreign Banks in Poor Countries: Theory and Evidence

By Enrica Detragiache, Poonam Gupta, Thierry Tressel

January 1, 2006

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Enrica Detragiache, Poonam Gupta, and Thierry Tressel. Foreign Banks in Poor Countries: Theory and Evidence, (USA: International Monetary Fund, 2006) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We study how foreign bank penetration affects financial sector development in poor countries. A theoretical model shows that when foreign banks are better at monitoring highend customers than domestic banks, their entry benefits those customers but may hurt other customers and worsen welfare. The model also predicts that credit to the private sector should be lower in countries with more foreign bank penetration. In the empirical section, we show that, in poor countries, a stronger foreign bank presence is robustly associated with less credit to the private sector both in cross-sectional and panel tests. In addition, in countries with more foreign bank penetration, credit growth is slower and there is less access to credit. We find no adverse effects of foreign bank presence in more advanced countries.

Subject: Bank credit, Banking, Commercial banks, Credit, Financial institutions, Financial markets, Financial sector development, Foreign banks, Money

Keywords: 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

Publication Details

Pages:

50
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/018
Stock No:

WPIEA2006018
ISBN:

9781451862782
ISSN:

1018-5941

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