Foreign Bank Entry Nexus Economic Growth: A panel DataAnalysis of Sub-Sahara African Countries andits implications for Ethiopia

Abstract

This study provides a general overview of the banking environment and direct andindirect links between foreign bank entry and economic growth in Sub-Sahara Africancountries using descriptive statistics and generalized method of moments (GMM)estimator. The researchers used descriptive analysis to compare banking service access,depth, stability, and competition between SSA countries that allow their banking sector toforeign investors and SSA countries that do not open the banking sector to foreigninvestors. A system GMM was applied to estimate the direct and indirect links betweenforeign bank entry and economic growth.The descriptive evidence suggests that SSA countries that allowed foreign bank entryhave better banking service access, depth, and competition than non-bank globalizedcountries. Consistent with all other SSA countries which do not allow foreign bank entry,Ethiopia has very low performance in bank penetration, depth, efficiency, andcompetitiveness as compared to bank globalized SSA countries. The two sets ofregression equations were estimated for (a) the direct effect of foreign banks and (b) theindirect effect of foreign banks on economic growth. A system GMM estimation resultshows that foreign bank asset share has a direct positive effect on economic growth and itis statistically significant. Foreign bank asset share also indirectly increases economicgrowth through improving efficiency. However, the foreign bank asset share has anegative sign on Z-score indicating that foreign bank entry reduces economic growthindirectly through increasing banking instability in SSA countries. Hence the morepragmatic and reasonable choice should be striking the balance between the two oppositeeffects.The findings of this study can provide imperative policy implications for Ethiopia.Ethiopia could open the door for foreign bank involvement in the financial sector andreap all the good benefits that SSA countries that open their banking industry to foreigninvestors are enjoying. However, enacting laws and implementing them in a morestringent approach is very essential to curb the potential instability effect of foreign bankentry on the banking sector..