Excerpt
TABLE OF CONTENTS
CHAPTER # 1
1.1 INTRODUCTION
1.2 HOW BANKS GO MULITNATIONAL
1.3 ENTRY OF FOREIGN BANKS THROUGH DIFFERENT WAYS
CHAPTER # 2
2.1 LITERATURE REVIEW
2.2 TRENDS IN FOREIGN BANKS INVESTMENT
2.3 DIFFERENCES BETWEEN DOMESTIC AND FOREIGN BANKS
2.4 IMPACT OF FOREIGN BANKS IN FINANCIAL SECTOR DEVELOPMENT
2.5 MAJOR TRENDS IN THE HISTORICAL EVOLUTION OF INTERNATIONAL BANKING
2.5.1 THE RISE OF INTERNATIONAL BANKING SINCE 1980s
2.6 REGIONAL COMPOSITION OF INTERNATIONAL BANKING ACTIVITY
2.7 DIFFERENCES IN BALANCE SHEET AND PERFORMANCE BETWEEN FOREIGN AND DOMESTIC BANKS
2.8 HOW DO FOREIGN BANKS’ MODE OF ENTRY AND ORGANIZATIONAL FORM AFFECT THEIR BEHAVIOR?
2.9 THE FUTURE OF FOREIGN BANKING
CHAPTER # 3
3.1 SIGNIFICANCE OF RESEARCH STUDY
3.2 HYPOTHESIS TO BE INVESTIGATED
3.3 METHODOLOGY
3.4 NAME OF BANKS WHERE EMPLOYEES GIVE THEIR RESPOND OF SURVEY QUESTIONNAIRES
CHAPTER # 4
4.1 SITUATIONAL ANALYSIS
4.2 MEASUREMENT
4.2.1 Technology
4.2.2 Consumer Loans
4.2.3 Customer services
4.3 DATA ANALYSIS
4.4 FORMAT OF MEASURE
4.5 VALIDITY
4.6 DATA COLLECTION METHOD
4.7 DESIGN OF QUESTIONNAIRES
4.8 RELIABILITY OF DATA
4.9 FACTOR ANALYSIS
4.9.1 PURPOSE OF FACTOR ANALYSIS
4.10 KMO AND BARTLETT’S TEST
4.10.1 KMO MEASURE OF SAMPLING ADEQUACY
4.11.1 BARTLETTE’S TEST OF SHPERICITY
4.12 COMMUNALITIES
4.13 FORMULATE THE PROBLEM
4.14 TOTAL VARIANCE EXPLAIN
4.16 COMPONENT MATRIX
CHAPTER # 5
5.1 CONCLUSION
5.2 RECOMMENDATIONS
5.3 SWOT ANALYSIS
CHAPTER # 6
6.1 REFERENCES
6.2 QUESTIONNAIRE
CHAPTER # 7
APPENDICES
CHAPTER # 8
DEFINITIONS
LIST OF TABLES
TABLE-7.6, Number of Banks by Host Country, Aggregates by Income Level and Region
TABLE-7.7, Number of Foreign Banks by Home Country, Aggregates by Income Level and Region
TABLE-7.8, NUMBER and Share of Foreign Banks from Home Regions to Host Regions, 1995 and 2009
TABLE-7.9, IMPORTANCE FOREIGN BANKS IN LOCAL BANKING SYSTEM 2007
TABLE-7.10, DIFFERENCES in Balance She et Be twee n Foreign and Domestic Banks (2007)
TABLE-7.11, Private Credit and Foreign Banks (2007)
TABLE-7.12, Important Foreign Banks in Local Banking System 2007
TABLE-7. 13, THE Global Financial Crisis and Credit Growth of Foreign and Domestic Banks
TABLE-7.14, COMPARATIVE Position of Number of Banks and Branches in the Country
TABLE-7.15, Baseline sample of host countries (developing countries), and corresponding number of foreign and domestic banks
TABLE-7.16, BASELINE sample of home countries by crisis and non-crisis status, with corresponding number of banks
TABLE-7.17, Percentage of Foreign Banks among Total Banks, by Country
TABLE-7.18, Percentage of Foreign Bank Assets among Total Bank Assets, by Country 203
LIST OF FIGURES
FIGURE-2.1, TURKISH BANKS RETURN OF EQUITY RATIO STATISTICAL DATA
FIGURE-2.2, TURKISH BANKS CAPITAL ADEQUACY RATIO STATISTICAL DATA
FIGURE-3.1, Percentage of response given by each respondent for factor technology
FIGURE-3.2, Percentage of response given by each respondent for consumer loans
FIGURE-3.3, Percentage of response given by each respondent for customer services
FIGURE-3.4, PERCENTAGE OF RESPONSE GIVEN BY TOP, MIDDLE AND FIRST LEVEL MANAGEMENT/MANAGERS
FIGURE-4.1, SCREE PLOT
FIGURE-7.1, Concentration of emerging market foreign banks, 1995 and 2009
FIGURE-7.2, Branches of Largest Banks
FIGURE-7.3, Number of foreign banks relative to all banks across developing countries
FIGURE-7.4, Share of assets held by foreign banks across developing countries
FIGURE-7.5, Total foreign claims relative to GDP across developing countries
FIGURE-7.6, FOREIGN BRANCHES AND SUBSIARIES
FIGURE-7.8, Number and Share of Foreign Banks, 1995 - 2009
FIGURE-7.9, NUMBER of Entries and Exits of Foreign Banks
FIGURE-7.10, Relative Foreign Bank Presence Across Host Countries, 1995 and 2009
FIGURE-7.11, Share of Foreign Banks in Investing in Own Region, 1995 and 2009
FIGURE-7.12, Relative importance foreign banks (2007)
FIGURE-7.13, Foreign Bank Presence by Top Host Countries, 2009
FIGURE-7.14, Foreign Bank Exports by Top Home Countries, 2009
FIGURE-7.15 , International bank claims and local claims in local currency
FIGURE-7.16, Ratio of international trade and banks’ international claims to global GDP
FIGURE-7.17, Ratio of banks' international positions to global GDP1
CHAPTER # 1
1.1 INTRODUCTION
This chapter explains the role of foreign banks in the developing countries. It addresses varied factors that originally create foreign banks more stable and profitable. It throws come upon practices that contribute lots in their success in domestic environment. The key factors like technology, customer services and consumer loans are basic components mentioned very well to support my analysis in exploring the effect of foreign banks on domestic banks business.
The process of economic globalization that accelerated in 1990s has brought several changes to developing countries’ financial sectors. Countries have displayed their stock markets to foreign investors, allowed domestic companies to cross-list and issue debt overseas, and welcome foreign direct investment into their domestic financial sectors. Once it involves the banking sector, arguably no modification has been as transformative because the increase in foreign bank participation in developing countries. Moreover in across developing countries, the share of bank assets command by foreign banks on average has increased from twenty two p.c in 1996 to thirty nine p.c in 2005. At the same time, foreign bank claims on developing countries, that alongside the loans extended by foreign bank branches and subsidiaries include cross-border loans, increased from ten % of GDP in 1996 to twenty six % in 2008.
Financial liberalization commenced since the 80th century has caused a radical modification within the financial systems of developing countries. We tend to understand the implementation of a deregulation method aimed to ascertain a market-based regulation that can improve the use of the obtainable funds.
Liberalization has been categorized into two parts; one is an external liberalization that aimed to get rid of controls on inflows and outflows of foreign capital and to promote the presence of foreign banks, and a domestic liberalization aimed to liberalize the interest rates and therefore the conditions granting of credits as well as develop the capital markets (Bouzidi Fathi, 2010: 103).
The presence of foreign banks in developing countries is taken into account as a part of the external financial liberalization. It is the results of the legal relaxation of the entry barriers that's supposed to encourage the installation of foreign banks. This is an answer for a country that suffers from inadequate domestic savings to attract foreign capital needed to finance economic development (Bouzidi Fathi, 2010: 103).
Several identical factors have contributed to the current development, we tend to mention specifically, the strategy adopted by these banks to monitor their prospects (multinationals) situated in these countries, the privatization of public banks failing since the Asian crisis “1997-1998” occurred (Bouzidi Fathi, 2010: 103).
There is an important research discussion encompassing the implications of foreign bank participation for developing countries as well as under developed countries. Promoters of this process argue that foreign banks will bring a lot of required capital with together technical skills, and products innovation in developing countries. Also, they cynosure the potential gains in terms of exaggerated competition and enhancements within the efficiency of the banking sector. On the opposite hand, the critics of foreign bank entry argue that foreign banks will destabilize the domestic banking sector as a result of variety of reasons.
First, foreign banks will “import” shocks from their home countries and/or unfold shocks from different developing countries during which they operate. Second, aggressive competition with foreign banks will threaten the survival of the domestic banks.
Finally, foreign banks will cause reduced access to finance for a majority of domestic companies and customers, if they solely focus on a high and elite section of the market. A number of things have recently led to a rise in FDI in the banking sector of developing countries (World Bank Report, 2006). Advances in telecommunications and information technology have enabled banks and different financial segments to better manage cross border activities. Moreover, banks have enlarged cross-border activities to serve a growing range of expatriates.
More recently, developing country banks have conjointly begun to expand across borders into other developing countries. South Africa’s magnified integration with the region, each in terms of trade as well as in terms of investment, has been a driving issue behind South Africa’s Standard Bank’s increased presence in southern and eastern Africa. What is more, Pakistan’s Habit Bank has targeted a well-established client base of expatriates through its branch network in South Asia (World Bank, 2006).
According to (Davies, 2002) and (Strachan, 2002) foreign banks account for 70 percent of the overall assets of the united kingdom banking sector, with regarding seventy percent incorporated subsidiaries of foreign banks or financial institutions, 372 European Economic Area (EEA) banks and regarding one hundred fifteen branches of non-EEA banks. Foreign banks created significant inroads into the U.S. market in the late 1970s and the 1980s.The assets of numerous foreign banks’ U.S. subsidiaries, branches, and agencies grew from $27 billion in 1972 to $1.1 trillion at the end of 1998—a 40-fold increase.
In distinction, the assets of domestically owned U.S. banks increase only 4.5 times, to $3.6 trillion, over the same period (Houpt, 1999: 600-615). The 700 foreign bank subsidiaries and branches within the US controlled fully 23 % of U.S. banking assets at the end of 1998. This fast rise in assets pushed the foreign banks’ share of business lending from 7.6 % to 27 % over the 1973–1997 period (Houpt, 1999: 600-615). International banks have access to a lot of investment alternatives and therefore are a lot of liable to “cut and run” than domestically owned banks, when their investments don't seem to be playing effectively (Juan Cárdenas, Juan Pablo Graf, Pascual O’Dogherty, 2008: 01-24).
Assets and liabilities can move quite pronto, generally at the push of a button, between the branch and the rest of the bank. In fair atmosphere, that's fine, however in times of crisis, the distinction between the branch and therefore the remainder of the bank, as well as the legal location of Banks’s assets and liabilities, may perhaps become vital indeed (Bollard, 2003a).When foreign banks started operations in a host country, the method cited as foreign bank entry—they do thus by opening a branch or a subsidiary, either as a brand new (de novo) operation or by acquiring a domestic bank.
The uniform level of financial integration represent by this activity now a days will solely be compared to the extent before world war I. Between the time 1920 and 1980 multi countries that had allowed foreign bank entry restricted it and no country that had forbidden foreign entry allowed it. Since that point the setup has swung back toward entry into domestic countries, In many countries in Latin America and Eastern Europe foreign-controlled banks currently hold half of the banking assets.
According to (Tschoegl, 2003: 02) there are two kinds of foreign banks that effect directly or indirectly to host countries domestic banks businesses, classic foreign banks and the innovators but innovators banks that we consider to as prospectors, first movers and restructurers.
Innovators entry into host country in order to bring opportunities but late on it creates crisis and drew some domestic banks into competition. The IMF Global Financial Stability Report (IGFSR, 2007) shows that in Eastern Europe, the overall assets of foreign banks increased from 25% in 1995 to 59% in 2005 and from 18% in 1995 to 38% in 2005 in Latin America. Academically, the positive impact of competition promoted by foreign banks is widely accepted in these emerging markets (e.g. Claessens et al., 2001: 891-911) , (Claessens and Laeven, 2004: 563–583) , (Levine, 2003: 05-21), (Yildirim and Philippatos, 2007b: 629–639) , (Claessens, 2009: 03-26), (Poghosyan and Poghosyan, 2010: 02-15) , (Jeon et al., 2011: 856–875).
However, in contrast to studies of foreign investment in real estate sectors, very little has been done to know whether or not there are knowledge spillovers from foreign banks to domestic banks as well as to competition effects. The strikingness of such understanding is clear, particularly when the break-out of the recent global crisis that raises certain issues relating to the market-driven model of those emerging markets.
In step with the EU Bank for Reconstruction and Development Transition Report (EBRD, 2009), there are signs of retardation down of transition progress. No doubt, any evident, even suggestive or in- direct, knowledge spillovers provides further argument for opening up the banking market. Recognizing the valuable expertise of East European and Latin American countries and also the limitation of the information, the aim is to entail future validation on knowledge spillovers associated with foreign investment in Report submitted by a Study Group established by the Committee on Global Financial system 2010.
The demand for banking services from international firms and aggressive emerging markets guarantees to underpin the longer term of international banking and its contribution to economic progress. In addition to extending monetary services, banks have a major player to play in promoting the cross border transfer of best follow and technological power in banking sector. In terms of the relations between foreign bank presence and financial sector development, patterns disagree by host country. Particularly, in high income and middle level income countries, foreign bank presence tends to possess associate insignificant relationship with credit extended.
However by considering in low income countries, foreign bank presence is related to less credit extended. In terms of economic stability, we discover that foreign banks usually reduced their domestic credit during 2009 more than domestic banks did. Foreign banks did enhance the soundness of domestic financial systems also in countries with majority foreign bank presence since their credit growth declined there but less than that of domestic banks (Stijn Claessens and Neeltje van Horen, January 2012: 05-06).
In terms of growth rates, variations between income groups and regions are considerable as well. In OECD and high income countries, the amount of foreign banks grew by 40 and 38 p.c severally between 1995 and 2009 whereas in emerging markets the amount of foreign banks grew by seventy two p.c, while foreign bank presence in developing countries increased by some 122 p.c over the same period. Growth rates over this era were far and away the very best in countries in Eastern Europe and Central Asia (225 percent), tracking by South Asia (120 p.c) Although, base was terribly low, foreign bank penetration during this region remains comparatively restricted, only fourteen percent. Latin America saw terribly robust growth early in the period.
After 1999, however, within the aftermath of Argentina and other financial crisis, several foreign banks exited the region and new entries remained restricted till a revived surge in investment within the region started in 2006 (Stijn Claessens and Neeltje van Horen, January 2012: 11).
In terms of home countries, variety of trends can be distinguished evidently; advanced countries tend to possess a lot of banks operational abroad than emerging markets and developing countries do. Especially, North America and Western Europe banks are active investors, covering sixty three p.c of all foreign banks within the sample period 2009.
Their importance of those regions as home countries is all the same somewhat declining, as their share accustomed by sixty six p.c in 1995 as well the number of foreign banks owned by OECD home countries grew by sixty one p.c over the sample period, those owned by emerging markets and developing countries grew by a hundred and fifteen, ninety and 103 p.c severally.
Consequently, there has been a rise in the share of foreign banks from emerging market and developing countries over the sample period, currently accounting for twenty seven p.c. In terms of growth, variations across regions are pronounced as well. Banks in Eastern Europe and Central Asia enhanced investments abroad the foremost, 240 p.c, and currently own eighty five foreign banks. Moreover banks in Sub-Saharan Africa sharply increased their foreign investments with the percentage 179, as did banks in North America and Middle East (134 percent). Latin American banks although saw a small decrease in outward investments (Stijn Claessens and Neeltje van Horen, January 2012: 11).
Research analysis on 2012, conducted by “Claessens and Neeltje” that contains statistical information on the possession of 5377 banks in 137 countries from 111 home countries. For every bank, ownership, domestic versus foreign, is set for every year the bank was active over the period 1995 to 2009, with all changes in ownership (from domestic to foreign and foreign to domestic) and all exits recorded. Important to research the factors behind the unfold and impact of foreign banks, the home country of the most investor of every bank is known. Using this information, the author illustrates salient trends in foreign bank presence over the past twenty years.
It shows that, albeit interrupted by the the global crisis, foreign bank presence has enlarged considerably in most countries, sometimes from none to foreign (Stijn Claessens and Neeltje van Horen, Jan 2012: 05). Banks holding 67 % market share (in terms of numbers) in a single decade. Additionally home countries became active as investors; in many emerging countries turning into vital “exporters.” though, with foreign bank presence starting from zero to 100%, substantial difference still exist.
An along with Pakistani banks, the number of foreign banks in operation in Islamic Republic of Pakistan at the end of June, 2012 has been 12 with 58 branches, that have offered robust competition to Pakistani banks and thereby contributed in upgrading the quality of banking within the country (State Bank of Pakistan Statistical Report, June 2012). Standard chartered Bank Pakistan is listed on the Karachi stock exchange, though 99% of its are owned by the bank’s parent. At 130 branches in twenty nine cities, its Pakistani retail branch network as well second largest for standard chartered Bank globally, second solely to its network in South Korea. Its success in Asian nation could be a case study in the virtues of a long-run investment horizon, and a lesson on however foreign banks will use technology to capitalize on growth in frontier markets (Farooq Termizi, March 2013).
Their growth, performance and expertness are so outstanding and commendable. This speaks volume of their efficiency, advance technology, innovative product and high customary of services currently in Islamic Republic of Pakistan, there's high sector concentration because the top 5 banks (out of total 44 banks) hold over 50 % of the industry assets, advances and deposits. The wave towards consolidation of banks is anticipated to reinforce competitive pressures, as example foreign banks are enhancing their stretch by acquisition of some strategic small banks that have a good branch network and few newer, comparatively smaller, private banks have unfolded their reach to most major cities.
These banks are currently providing clients and choice to diversify their business and not completely addicted to nationalize and large privatized banks that were the sole subgroups that had nation-wide branch network (Dr. Shamshad, 2006).
1.2 HOW BANKS GO MULITNATIONAL
Multinational banks (MNB) by precise meaning, area unit people physically operate in more than one country. Multinational Banks have to be compelled to be different from international banks that act in cross-border operations and do not discover operations in various countries. There are two main ways by which foreign banks discovered its operations in rising market economies – 1) through cross-border mergers and acquisitions or via 2) Greenfield investment. Investment through mergers and acquisitions is to boot conscious of as investment through taking over. What this interpretation meaning is that foreign bank purchase existing banks in other emerging market economic countries or somewhere else. Initially, foreign bank buys small part of a domestic bank and over time expand their investment, until the majority ownership is inborn.
This approach might even be thought to be typical for enlargement into the transition economic countries, where the privatization on state owned banks, has taken place. In some countries, acquiring for existing bank suggests that getting around restrictions regarding Greenfields. As an example, in most cases in European nation foreign banks were needed, to take over existing troubled Polish banks, and procure licenses (EBRD, 1998).
Foreign banks increased credit accessibility in developing countries and created the delivery of credit more economical, and foreign creditors typically introduced superior lending technologies and marketing know-how. Large banks, from high-income countries specially, tend to perform well in less developed countries. In Emerging Europe particularly, wherever industrial banks were rare at the start of the 1990s, there have been substantial potency gains following foreign entry (EBRD Report, 2012: 48).
Foreign banks additionally generated positive spillovers to domestic banks, for example in terms of repetition risk management methodologies, whereas competition attended create bank lending cheaper. A number of these gains might at first have come back at the cost of reduced lending to small and medium-sized enterprises (SMEs), as foreign banks can target the “best” customers and leave tougher clients to domestic banks (EBRD Report, 2012: 48).
Foreign banks entrees are created many in an extremely different ways. The entry determines the type of operation and level of risk that the foreign bank can bear. Foreign banks can adopt a spread of organization forms once coming into host countries.
1.3 Entry of foreign banks through different ways
i. REPRESENTATIVE OFFICES
The foremost restricted, but most easily established organization kind. This setup does not accept deposits, nor can it build loans, they act as agents for foreign banks, and typically established to visualize the prospect of additional invest. They are able to build business and industrial loans but cannot build client loans or settle for deposit (Florida Veljanoska, 2011: 02-13).
ii. BRANCHES
Most significant organization kind is an associate integral a part of a parent bank, shared the facility to draw on the parent’s capital base and provide a decent vary of services (Florida Veljanoska, 2011: 02-13).
iii. SUBSIDIARIES
Permissible to possess interaction in an exceedingly broader vary of economic services. In many countries they have authorization powers just like those of domestic banks and so regulated the same approach (Florida Veljanoska, 2011: 02-13).
The remainder of this paper is organized as follows;
CHAPTER # 2
Chapter 2 presents a literature review on the studies that describes the impact of foreign banks practices on the domestic banks business. Chapter 3 describes the methodology employed and the sample data used in this study. Chapter 4 describes the empirical and surveyed results, while the concluding remarks are discussed in the last section.
2.1 LITERATURE REVIEW
This chapter describes the impact of foreign bank practices on the domestic banks business with the help of various literatures. The literature is helpful for the better understanding of the issue. It clarifies the role of foreign banks in domestic economy and their impact on the overall banking sector. The contribution of the foreign banks towards improving the efficiency and business of the domestic banks is explained in detail to grasp the context of the issue. It supports the research discussion and analysis. This paper takes up the challenge by aiming to examine whether foreign bank entry stimulates domestic banks in the developing countries.
Between 1980-2000, many countries had allowed foreign bank entry in their economy. Since that time the situation has changed dramatically. Once the financial and currency crisis in 1990, several emerging market economies particularly in Latin America and Eastern and Central Europe, has unfolded their banking industry for foreign banks entry.
As results of liberalization financial markets became progressively integrated, and plenty of transnational banks have expanded their presence considerably in many growing market economies. In spite of the actual fact that world banks principally improve the potency, stability and competition within the banking sector, such entry might have some harmful facet effects (Florida Veljanoska, 2011: 02-13).
The entry of foreign banks brings giant advantages to host countries, economic system and economies at large. Advantages might be totally different, from efficient gains led to by new technologies, product & management techniques as well as from exaggerated competition stirred up by new entrants. Foreign banks even have larger access to resources from abroad; they have more stable funding and lending pattern than domestic banks. Another benefit comes with the fact that they hold a more geographically diversified credit portfolio and consequently would not be as affected during periods of depression in the host country.
In developing countries wherever wealth is extremely targeted, it's common that bank’s board members, stockholders in addition as giant borrowers area unit closely connected. Foreign banks owe do not get involved in connected lending, together because they do not have related parties in the host country and their widely held equity structure does not encourage this kind of behavior. Foreign banks can have stabilizing character during the crisis in the host country, because they are considered to bring new and fresh capital whenever countries suffer from financial or real sector crisis. As we are able to see from the past literature, advantages for the host countries from the foreign banks entry are often giant and totally different.
Now, we'll try and summarize them. Improving the efficiency and profitability, although there are differences between the studies that examine the impact of foreign banks entry on the efficiency and profitability in host countries’ banking sector, generally accepted fact is that foreign bank entry, increases efficiency and profitability in domestic banking system.
The reason is that foreign banks have superior credit technologies, better management, and expertise governance structures and are less open to government and political interference than domestic banks. First off, we have to differentiate the collision of foreign banks entry and the impact in developing countries, simply because the evidences are different.
Foreign bank entry refers to the method by which banks operate on the far side their national borders by establishing foreign subsidiaries and branches or by taking over banks already operating in the host market (Leung et al., 2003: 330). During the last twenty years variety of changes have occurred in the banking sector, like the institutional changes, the deregulation of the industry, the technological progress furthermore the liberalization of capital flow between domestic and foreign residents.
Foreign banks are profitable and economical than domestic banks in developing market economies, whereas in developed countries domestic banks are more profitable and economical than foreign banks.
These variations will reflect a differential impact on informational benefits, client base, bank procedures furthermore as totally different relevant regulative and tax regimes. There are solely few studies on the income and efficiency of the banking sector in the developing countries. (Green et al., 2004) identify the economy of scale and scope through the efficiency of domestic and foreign banks in CEE countries.
They realize that foreign banks aren't extremely totally different from domestic banks and bank ownership isn't a very important factor in reducing bank cost. (Green et al., 2004: 175-205.) , (Yildirim and Philippatos, 2002: 02-29) realize that foreign banks in transition countries are more efficient and economical, however by comparison less profit efficient relative to domestic banks. (Yildirim and Philippatos, 2002: 02-29 ) , (Zajc, 2002) found for 6 European transition economies, that foreign bank entry eliminates net- interest, financial gain and profit, and increase value of domestic banks.
In order to look at to what extent foreign banks are more economical and profitable in transition countries, (Naaborg et al., 2006, 2008) assess variety of indicators at mixture level for each foreign and domestic banks: the return on assets (ROA), after tax income and overhead costs.
The primary indicators reflect banks’ gain and final one reflects operational efficiency of the banks. The introduction of foreign banks is a component of the banking reform. Foreign capital from or through international banks is anticipated to bridge the gap between domestic savings and investment. Moreover, foreign banks that operate internationally are expected to assist enhance competitive dominance and improve the structure of the country’s banking system (Leung, 1997: 365–376).
Supporters of foreign direct investment (FDI) argue that foreign banks are a very important source of capital furthermore as skills, technology, and management know-how (Heiner schulz, 2004: 02). (Narsimham Committee, 1991) has emphasized that the liberal entry of foreign banks (FBs) would supply spillover edges to financial sector by rising competitive efficiency and by upgrading work culture and technology of the Indian banking system. (Claessens and Laeven, 2003: 563-83) found that larger foreign bank existence and fewer activity restrictions within the banking sector will result in a lot of competition in banking systems.
As far as the connection of foreign bank existence, domestic bank mediocre and financial and economic development is concerned, there are each positive and negative result of foreign bank participation on the domestic banking industry and economy (Claessens, Demirguc Kunt and Huizinga, 2001: 891-911) , (Goldberg, Deges and Kinney, 1999, 2000: 17-36).
In several less developed countries (LDCs), inefficient domestic banks and a lack of competition among lenders end in high borrowing costs and limited financial access for several firms (Todd A. Gormley, Feb 2007: 02).Range of developed countries, like the U.S.A, Japan, & those within the European community, argue that LDCs ought to permit foreign banks to enter into their economic regions and states.
Foreign bank entry might increase the provision of credit and improve efficiency by entering into developing countries. However, banking theories that incorporate data asymmetries demonstrate that bigger competition among banks may very well reduce some firm’s access to credit. Moreover, the high cost of feat data regarding local firms might limit foreign banks to ‘cream-skimming’, wherever they offer loans solely to the foremost profitable local firms (Dell’Arricia and Marquez, 2004: 185-214) , (Sengupta,2006:503-506) and adversely have an effect on each domestic banks and also the corporations that depend on them (Gormley, 2013: 02-23).
Cross-country comparisons of foreign bank possession and also the mode of foreign entry more support the potential importance of acquisitions in reducing segmentation of the credit market (Gormley, 2010: 27-28). As an example this, It has been used on bank possession in 105 LDCs that was compiled by (Claessens and Van Horen, 2012a: 05-19).In the Claessens and Van Horen information, foreign bank entry is discovered in 92 of the 103 LDCs by 2003, and entry via acquisition is observed in 63 of these 92 countries.
In LDCs in which entry via acquisitions is allowed, foreign banks management, on average, 42.9% of the banking assets between 1995 and 2003, and more than half these assets were acquired via an acquisition.
However, in LDCs within which no acquisitions are discovered, foreign ownership is significantly less. In these countries, foreign banks solely own, on average, 35.9% of the banking assets; the distinction in ownership levels is statistically important at the 1/2 level (p-value = 0.004). An absence of acquisitions is additionally extremely correlative with a restricted entry by foreign banks. As of 2003, foreign banks management but five-hitter of the banking assets in two hundredth of the LDCs within which no acquisitions are ascertained, whereas this kind of restricted entry happens in mere 3rd of countries that enable mergers. The distinction is statistically important at the 1/2 level (p-value = 0.007).
Country-level bank regulations and institutions are associated with the cost of financial intermediation and bank behavior (Demirgüç Kunt, Laeven, and Levine, 2004: 593-622).Recent work by (Dell’Ariccia and Marquez, 2004: 185-214) and (Sengupta, 2006: 503-506) demonstrate that these variations among loaners will cause a segmentation of the market whereby the less-informed lender competes away less captive and less informationally-opaque firms from the domestic lender.
Moreover, (Gormley, 2006) demonstrates that this segmentation of the market will induce the better-informed domestic lenders to exit some markets entirely, thereby reducing credit access to corporations in these markets.(Gormley, 2006) suggests that reducing information barriers endemic to LDC (Less developed countries) credit markets might increase the vary of corporations that foreign banks are willing to finance upon entry and cut back the probability that informationally-opaque corporations are going to be adversely affected by their entry.
(Claessens, Demirguc Kunt, and Huizinga, 2001: 891-911) uncover proof that foreign bank entry is related to lower profit margins among domestic banks, whereas (Berger, Klapper, and Udell, 2001: 2127-2167) , (Haber and Musacchio, 2005: 02-22) and (Mian,2006: 1465-1505) give proof that foreign banks tend to finance solely larger, more established firms. (Clarke, Cull, and Peria, 2001: 02-21) realize that entrepreneurs in countries with high levels of foreign bank possession understand interest rates and access to loans as smaller constraints to their operations, whereas (Detragiache, Gupta, and Tressal, 2005: 02-42) realize that foreign ownership is negatively associated with mixture measures of banking sector performance. At intervals within European countries, (Giannetti and Ongena, 2005: 05-33) realize the share of foreign lending to be absolutely associated with firm level sales growth, particularly for larger corporations.
Foreign banks use their superior management skills and culture, whereas domestic banks (DBs) are supported a learning-by-doing method (Intarachote and Williams, 2003). A lot of significantly, empirical studies have disclosed the existence of a correlation between foreign ownership of banks and stability of the banking industry (Caprio and Honahan, 2000) and (Goldberg et al., 2000: 17–36).
One potential channel for the way foreign banks might foster such a restructuring method is spillover aspects from foreign to domestic banks, another potential channel may be the rise in competition. However, the gap from banking markets can even entail giant risks since domestic banks got to undertake immense investments to become competitive to foreign banks (Maria Lehner and Monika Schnitzer, 2006: 01-02).
(Buch, 2003: 851-869) sets up a theoretical model of foreign bank entry and finds empirical support for the hypothesis that enormous information barriers discourage entry of foreign banks.
(Hauswald and Marquez, 2003: 921-948) contemplate the chance of information spillovers from incumbent host country banks to potential entrants and show that, consequently, interest rates and bank profits decrease. (Kaas, 2004: 05-34) presents a model of special loan competition and arrives at the conclusion that foreign bank entry is mostly too low compared to the social optimum.
(Claeys and Hainz, 2006: 07-27) and (Van Tassel and Vishwasrao, 2005:03-27) examine however completely different entry modes of foreign banks have an effect on competition in an exceedingly liberalized banking market. Each approach implies that Greenfield entry ends up in a lot of competition and therefore lower interest rates within the host banking market.
(Boot and Marinc, 2006) which Coercer competition in terms of an increasing of banks operational within the market reduces banks reports to invest in better monitoring technologies. (Fries and Taci, 2005: 55-81) study the price efficiency of banks in Eastern European Countries and realize that costs of all banks are lower once the presence of foreign banks in an exceedingly country is high. (Martinez Peria and Mody, 2004: 511-537) distinguish between acquisition and Greenfield entry within the context of Latin America.
They realize that the rate uncover of foreign banks getting into via a de novo investment is less than that of banks getting into via the acquisition of a domestic country bank. Moreover, their analyses suggest that the next presence of foreign banks ends up in lower costs of all banks operating within the market.
In the last fifteen years there has been a speedy increase in the activity of foreign banks in many developing economies. In spite of that, foreign bank entry occurred in several developing and fewer countries, its pattern wasn't uniform (IMF, 2000).
In Latin America likewise as within the Central European (CE) countries, the share of foreign banks at the half of the 1990's was well below twenty per cent and a decade later the foreign banks controlled virtually seventy five per cent of total banking assets. Against this, in East Asia over a similar period, the average share rose solely from three to 7% (Barth, 2004: 205-548). The percentage of development of a country appears additionally to not be a noticeable determinant explaining foreign bank entries. Egypt or Bangladesh likewise countries, the foreign banks hold ten per cent of banking assets; on the opposite hand in Asian nation, European nation or Turkey over sixty % is in the foreign hands.
Other cross-country studies that compare the relative performance of foreign and domestic banks, realize that foreign banks have comparatively higher interest margins and profitableness and lower overhead costs in developing host countries (Panizza, and Yanez, 2007: 219-41). Those researchers find the consequence that foreign banks in developing countries are comparatively strong competitors in under-developed banking markets and may exert pressure on domestic banks to become more economical and competitive. Early case studies for countries in Latin America realize ends up in line with those from the cross-country empirical study. Foreign bank existence through the mid-1990s was connected to lower interest margins, overhead costs, and profitableness of domestic banks in Argentina (Clarke et al., 2000).
In South American country, foreign bank presence was connected to declining non-financial cost for domestic banks (Barajas, et al., 2000: 355-387).Case study proofs from individual countries in Eastern Europe and Central Asia also came into points to increased competition as results of foreign bank entry. Stochastic frontier analysis, identify the outcome of their research, foreign banks in Republic of Hungary were found to be more cost efficient than domestic banks, except in the medium-size vary (Kiraly, et al., 2000).
In Poland, foreign banks were found to be more cost efficient than domestic banks, beside those domestic banks that had a high share of foreign customers (Nikiel and Opiela, 2002: 255-71). Following the same time, foreign banks (and domestic banks that catered to a foreign clientele) weren't essentially more profit efficient than other banks. In all, the results from European country recommend that foreign bank entry contributed to accumulated competition, however in specific market niches.
Regional studies for Latin America and Eastern Europe yield a lot of ambiguous conclusions than country case studies. whereas a study on Argentina, Chile, Colombia, Mexico, and Republic of Peru reveals that operating foreign presence coincided with reductions in operative costs that, in turn, facilitate to slender spreads (Martinez Peria and Mody, 2004: 511-537), another study that used the H-statistic because the measure of competition, together with the same countries along with Brazil, Costa Rica, and Salvador, concludes that foreign bank presence weakened competition (Levy-Yeyati and Micco, 2007: 1633-47).
For Eastern Europe and Central Asia, whereas some studies based on cost estimations for 9 countries from 1995 to 1999 fail to verify that foreign banks are more cost efficient than domestic banks (Green et al., 2003, 2004: 175-205) a series of alternative studies yield opposite results. For instance, one study supported 319 banks across 10 countries finds that greater foreign bank presence is related to lower non-interest income, profits, as well as interest rates.
Stochastic frontier analysis unconcealed foreign banks to be more cost and profit efficient than domestic banks, particularly state-owned domestic banks (Bonin et al., 2005). Information envelope analysis on a larger set of banks from seventeen countries conjointly confirms that foreign banks were more efficient than their domestic counterparts in the half of the 1990s (Grigorian and Manole, 2006: 497-522).
A stochastic frontier analysis in Eastern Europe and Central Asia on 562 banks from 1993 to 2000 finds that foreign banks are more cost efficient than domestic banks, but less profit efficient (Semih, Yildirim, and Philippatos, 2007: 123–43). On balance, we have a tendency to read the results from Eastern Europe and Latin America as supporting improvement in competition attributable to foreign bank entry, particularly in terms of cost reduction. On the opposite hand, the proof from Asia is way less validating of the hypothesis that foreign banks facilitate to enhance competition in the domestic system.
In part, this might be a mirrored image of the restricted extent to that Asian countries have embraced foreign bank participation relative to other regions. At the intense are China and Asian nations, that severely restricted the entry and activities of foreign banks. Stochastic frontier analysis shows that foreign banks are less cost efficient and productive than domestic banks in India (Sensarma, 2006: 717-735).
In part, this could be explained by the dominance of India’s state-owned banking sector. It conjointly comes as very little surprise that the profitability of the few foreign banks in China was below that of domestic banks from 1996 to 2004 (Wu, Chen, and Lin, 2007: 343-357).
Those authors argue that majority foreign owned banks don't have an effect on the operational performance of domestic Chinese banks. However, recent proof indicates that banks with greater (minority) foreign ownership shares and fewer state ownership are more cost and profit efficient than others in China (Berger, Hasan, and Zhou, 2009: 113-30) and Chinese banks that signed cooperation agreements with foreign strategic investors reduced their non-performing loans (NPLs) magnitude relations and increased their ratio of reserves to NPLs (Zhu et al., 2009).
Results from the last inclusive research may offer a sign of the potential competitive edges if China and Asian nation were to pursue a policy of larger openness to foreign banks. Results are more assertive, though still mixed for other Asian countries. In part, this might ensue to the Asian financial crisis and to the restricted extent to that Asian countries permissible foreign bank participation before the crisis. Both factors make it harder to identify any pro-competitive effects of foreign entry. For instance, in Korea foreign bank entry was related to lower costs ratios for domestic banks, however solely among larger banks that had nationwide reach (Lee, 2003: 42-65). As in Korea, exaggerated foreign bank presence together Philippines was related to enhancements in the efficiency and competitiveness of large domestic banks, whereas the profits of banks related to business groups declined and their efficiency failed to improve (Unite and Sullivan, 2002).
In the case of Thailand, family and inherited ownership of banks gave thanks to foreign and state ownership as results of the crisis. Identifying results based on movements in the Lerner index don't reveal substantial improvement in competition as results of this variation in ownership structure (Kubo, 2006). Of course, very little time had passed since the crisis and foreign banks were acquiring the foremost troubled domestic banks throughout this period.
A newer study indicates that foreign bank presence is related to reductions in personnel expenses, net interest margins, and return on assets (ROA) for domestic banks and that improvement on efficiency measures was highest for banks acquired by foreign banks (Heberholz, 2008: 215-244). Our overall view is that given the comparatively low levels of foreign bank participation in most Asian countries, relatively moderate competitive effects on the domestic banking sector should have been expected.
2.2 TRENDS IN FOREIGN BANKS INVESTMENT
Recently, new, comprehensive information on bank ownership, identifying also home country of foreign banks, for 137 countries over the period 1995–2009, (Claessens and Van Horen 2012: 03-35) have been completed, with key facts summarized in our previous session. The information shows some salient trends. Our paper documents have already been described, although foreign banks has been interrupted with global financial crisis, foreign bank existence, in terms of number and share among domestic banks, has enhanced substantially in most countries over the past 3 decades. Sometimes increases have been from zero to foreign banks holding sixty seven percent market shares during a single decade. Not several countries are ignored from this trend, however substantial variations still exist. Over the time, many home countries became active as investors, in many emerging countries turning into necessary ‘exporters’.
Having stock at the end of year 2007, just before the crisis, foreign banks had been possession on average about 20% of market shares in OECD countries, in terms of loans, deposits and profits, and near to 50% in emerging markets and developing countries.
In addition, in those countries with majority of foreign banks, foreign banks tend to be a lot of vital in mediation. In distinction, once diminished in numbers, foreign banks tend to be niche players. Foreign ownership, even so, is generally regional. This pattern has really become stronger over time with a lot of banks from developing countries that have a stronger tendency to remain within their own countryside, establishing a presence abroad.
2.3 DIFFERENCES BETWEEN DOMESTIC AND FOREIGN BANKS
Foreign banks differ from domestic banks in key balance-sheet differentiation. Notifying, foreign banks have higher capital and a lot of liquidity. In terms of performance, foreign banks underperform domestic banks in differently markets and developing countries; however don't perform otherwise in high-income countries. These variations potential replicate part variations in business ways between foreign and domestic banks but a lot of variations in host-country circumstances. Significantly, performance might disagree as a result of foreign banks have a lot of conservative portfolios and operate with less ease in some countries than domestic banks do (Claessens and Van Horen, 2011: 14-16). They have interaction comparatively less in traditional lending businesses, particularly when smaller.
2.4 IMPACT OF FOREIGN BANKS IN FINANCIAL SECTOR DEVELOPMENT
A crucial question has been the impact of foreign-bank activity on a number country’s monetary development. Before the crisis, consensus accord was that the benefits greatly outweigh the costs in many dimensions. It had been usually thought of that foreign banks augment domestic competition, upgrade the standard of economic interposition, increase access to financial and economic services, as well as monetary and economic performance of their borrowers, improve the consumer services and make larger monetary stability (Cull and Martinez Peria, 2010: 02-23). The effects of foreign banks on development and efficiency are found to discriminate though. Restricted general development barriers can hinder the effectiveness of foreign banks. With plenty of restricted entry as a share of the host banking industry, fewer spillovers seem to arise and bigger foreign banks seem associated with larger effects on access to finance for small and medium sized enterprises, because of market commitment.
In addition, richer domestic banks show raising in credit growth .Through few literature analysis it has been noticed that foreign banks can have perverse effects. As a results of foreign banks ‘cherry-pick’ borrowers, Lower financial development has been seen in developing countries respectively undermine overall access to financial services, since cherry-picking worsen the remaining credit pool, and where relationship lending is incredibly important (Detragiache et al., 2008).
In developing economic markets and high-income countries, foreign-bank presence tends to possess an insignificant relationship with credit enlargement. Through pre-found empirical survey it has been justified that in developing countries, however, foreign-bank presence is related to less overall credit extended.
Indeed, within these countries a one variance increase in the foreign-bank share is related to a decline privately credit–to-GDP of 5 share points, economically very huge, since the mean of personal credit–to-GDP throughout this group of states is simply 19. Of course, typically this can be often not basically a causative relationship.In summary, whereas foreign bank presence might have a negative relationship with financial development, typically this can be often not a standard result. That’s why; it is concisely to allow for variations in foreign bank presence, level of development, and different factors once considering the association between foreign banks, domestic credit creation, and different aspects of economic sector development.
The differences are also significance among the transition countries. In Uzbekistan or in Azerbaijan the share of foreign banks appears less than five per cent, whereas in such European countries as Hungary or Lithuania it amounts to virtually one hundred per cent. The discrepancies and variation are considered in the developed countries. In France, Germany or United States, the foreign-controlled banks grasp less than ten per cent of assets, whereas in New Zealand or in Luxemburg they hold more than ninety per cent.
The significance financial system has been shown to be a vital ingredient for sustainable and established economic growth (Levine 2005: 867-062, World Bank, 2001). The theories on foreign banking has also seem that foreign bank participation can assist develop a better efficient, effective and sturdy financial set-up (Claessens et al., 2001: 891-911). Most evidences show that range of increased foreign banking is usually completely related to with the advance of the efficiency of the domestic banking sectors and helps developing countries financial systems. Mainly, research studies on the developing countries have shown that these countries have benefited from this trend at the most.
Therefore, from the policy views its significance to grasp what determines a favorable atmosphere that inspire cross-border activity and getting into foreign banks. Though the recent trends within the banking internationalization, twenty eight p.c of developing countries still have foreign bank participation below ten percent and sixty percent of developing countries have below fifty percent. Among these developing countries with the foreign bank assets below ten percent, the transition countries quantity to almost twenty percent and twenty five percent of the sample with the foreign bank participation below fifty percent (Van Horen, 2006: 47-53 and EBRD).
Because the expertise of some Central and Eastern European (CEE) transition countries have shown the foreign bank participation has turned out to be inevitable to create stable and economical financial set-up. For this reason, we might suppose that in other developing and transition countries, the getting into the foreign banks may additionally end up to be necessary within the close to future.
Today, the banking sectors of most transition countries are among those with the best share of foreign controlled banking asset in the world. It ranges from seventy per cent in Republic of Poland to almost one hundred percent in Slovakia (Allen ET al., 2006). The amendment within the share of foreign participation in banking in these countries from the early transition years to the later ones is significant. Hungary was the leader among the CE countries within the banking reforms. The government began the banking reforms even before the political changes. In the early era 1980s the Hungarian government permitted variety of foreign banks to line up operations, although, these banks competed with state-owned banks within the areas of foreign exchange and trade-related transactions.
The integral centralized mono-banking system was replaced by a two-tier banking industry as national bank of Hungary assumed the role of central bank in 1987. The new central bank was charged with following monetary policy, as well as exchange rate policy, and was created liable for the oversight of the banking sector. The second major tier composed of the specialty banks, freshly created commercial banks, and also the few already operating foreign banks (Hasan and Marton, 2003: 2249–71).
In Poland the reform of the banking system started in 1987, once the government allowed for creation of the joint-stock banks, however they were still owned by the state. Two years later a replacement banking law was introduced, that created a two-tier banking system in Poland. Altogether the CE countries as a method of making a two-tier banking system the commercial and retail operation was divested from the activity of national banks and transferred to new commercial banks. In Republic of Hungary the government started 3 new state-owned banks from the national bank of Hungary, in Poland 9 banks were created out of the national bank of Poland, whereas in the Czechoslovakia through divestment form the state bank of Czechoslovakia, four banks were established.
These mediums sized state-owned banks hereditary segments of the old network and employees of the household deposits, national and states banks, and loan portfolio comprising primarily of credits granted to the state enterprises of unknown quality.
They supplemented the already existing massive state-owned specialty banks. Those specialty banks existed severally from the central bank and performed specific functions on behalf of the government in the planned economies. A state savings bank with an intensive branch network was liable for collecting household deposits, though most savings was forced and done by the state.
An overseas trade bank handled all transactions involving foreign currency. An agricultural bank provided short funding to the agricultural sector. A construction bank funded long capital projects and infrastructure development (Bonin and Wachtel, 2003: 1-66).
On April twenty five, 1821, Prince regent Dom João VI set sail from Brazil to Portugal in an endeavor to manage a revolution that was current there, carrying with him an outsized a part of the deposits of the Banco do Federative Republic of Brazil, the colony's major financial institution.
The bank that was already in crisis as results of its close ties with the Portuguese Crown was left bankrupt as results of Joao's sanctions. Clearly, the priority that foreign banks could see once their home countries experience difficult times is neither unwarranted nor unexampled (Jonathon Adams-Kane, Julian A. Caballero, Jamus Jerome Lim Policy Research September, 2013: 02).
Indeed, over the long course of history, governments have usually weighed potential liquidity and growth benefits of foreign bank presence against fears that such banks could prove unreliable sources of capital in times of crisis. In developing countries, actuaries seeking to liberalize their financial sectors are habitually referred to as on to make a decision whether or not foreign banks are to be allowed into their domestic financial markets, and consequently if so, to what extent such banks have the freedom to work vis-_a-vis domestic banks. Foreign bank presence in developing countries by asking whether or not foreign banks do so build completely different credit provision selections once their home economies are undergoing hard times.
Above all, we tend to examine whether or not the lending activity of majority foreign-owned financial institutions that fully fledged a crisis in their home countries disagree consistently in their institutions behavior relative to foreign-owned establishments that didn't, inside the overall setting of the world financial crisis of 2007/08.
Whether foreign-owned banks opt to reduce on their lending activity in such circumstances is way from transparent. Foreign subsidiaries suffering a financial crisis in their home country could opt to repatriate capital to an indisposed parent bank, however it's even as plausible that parent banks allocate plus portfolios toward markets comparatively less affected by the crisis. The problem of foreign bank lending throughout financial crisis is therefore, obviously, an empirical first hand question.
Our empirical exploration seeks to answer this question by wishing on a quasi-experimental difference-in-difference (DiD) approach. Our baseline sample attracts on a unique bank ownership dataset collected across countries and over time, and contains 361 foreign-owned banks based mostly in developing countries over the course of the recent 2007/08 world financial crisis and within the immediate pre- and post-crisis years (2006 and 2009).
We tend to outline our crisis “treatment” as a financial or banking crisis (Laeven and Valencia, 2012) knowledgeable experienced home country of the foreign-owned bank.Crucial for our identification strategy is that the undeniable fact that, whereas financial crisis practiced in the home economy could or closely tied to the performance of banks based mostly in the crisis economy, foreign subsidiaries of those banks are unlikely to have contributed to the crisis there, in order that the crisis event was an “import” from high-income countries.
From the angle of those banks, then, the financial crisis was primarily an exogenous event, even as it had been for different foreign banks placed inside the host economy, with the crucial distinction being that the previous group may after be subject to potential constraints resulting from the home-country crisis, such as the got to repatriate profits to their parent banks, in case foreign banks not facing similar shocks in their home economies wouldn't expertise.
We exploit this exogenous variation to know the result of a home-country crisis on foreign bank credit behavior in our baseline difference-in-difference specification. We have a tendency to additional refine our baseline estimate by scrutiny pairs (or small groups) of notably comparable foreign banks via a DiD style that matches them on variety of observables.
During a host of checks and balances, we have a tendency to think about different methods designed to isolate the causative effects of the crisis treatment, like the inclusion of extra bank and country-level controls, falsification tests that think about whether or not different non-crisis mechanisms could also be driving the results, and exploring numerous dimensions of no uniformity in the crisis result among the foreign banks.
These complementary methodologies so enable U.S.A. to each determine the causative result of a crisis during a foreign bank’s home country on the amendment within the bank’s loaning activity before and once the crisis, additionally as offer some sense of whether or not certain banks or country-specific characteristics could have contributed to the calculable average treatment result on the treated. This is not the case once the crisis originated from the foreign bank’s home country. Thus, instead of increasing lending in a trial to diversify off from the shock practiced in their home countries, such banks in all probability repatriate capital to prop up the liquidity and enduring contraction in liquidity from their parents.
After we explore the difficulty of heterogeneousness among any foreign banks, we tend to conjointly realize proof suggesting that non-crisis foreign bank disposition could have helped offset reductions in post-crisis disposition by crisis-stricken foreign banks and domestic banks, which the crisis that round-faced foreign banks in Eastern Europe was particularly severe.
The empirical literature on bank possession and economic outcomes has grown up dramatically over the past decade. However, partly attributable to knowledge limitations, abundant of the literature tends to review a given country or region. A number of these studies have, like this one, been involved with foreign bank behavior throughout a crisis. For instance (Chava and Purnanandam, 2011) and (Schnabl, 2012) gave evocative proof of negative spillovers via foreign banks of the Russian crisis of 1998 to corporations within the U.S. and Peru, severally.
Within the setting of the crisis of 2007 and 20008, (Galindo et al., 2010) document negative spillovers of foreign banks in geographical region, (Popov and Udell, 2012) and (Ongena et al, 2012) in Eastern Europe, (Aiyar, 2012) and (Rose and Wieladek, 2011) within the United Kingdom, and (Cetorelli and Cartoonist, 2012b) within the USA.
Our main result's that foreign banks owned by countries experiencing crisis do in reality expertise a post-crisis amendment in their lending that's comparatively lower by between thirteen and 42 percentage points in our baseline, compared to non-crisis foreign banks. Hence, while foreign banks have, on average, been a compel for financial stability and efficiency in developing countries facing domestic financial crisis (Clarke et al., 2003: 25-59) , (De Haas and van Lelyveld, 2010: 1-25) , (Mart´ınez-Peria et al., 2005), (Wu et al., 2011: 1128–1156).
Relatively few papers have thought of the precise issue of the influence of foreign bank ownership on credit across a wider vary of nations (Cetorelli and Goldberg, 2011: 41–76), (Clarke et al., 2006), (Detragiache et al., 2008).However, foreign bank presence in an economy is usually measured at a mixture level; instead of the bank and home country specific level we have a tendency to use (which permits USA to map banks to home-specific shocks).
To the extent that some papers have worked with bank level information, their bases for comparison are different (De Haas and Van Lelyveld, 2010: 1-25). As an example, prohibit their analysis to solely subsidiaries of the forty five wealthiest foreign banks, while (Galindo et al., 2010:1-25) focus on Latin American host countries. Similarly, (De Haas and Van Lelyveld, 2013: 02-20) and (Claessens and Van Horen, 2013: 02-19) are involved with benchmarking lending by foreign subsidiaries of multinational banks against that of domestic banks.
Since we have a tendency to have an interest within the effects of a crisis in the home country on lending activity by foreign banks, our study restricts itself to solely the set of foreign-owned banks in operation in developing countries, since we have a tendency to believe that foreign banks from non-crisis home countries supply the purest management group for our treatment of interest.
(Crystal et al, 2001) suggested that foreign ownership could give significance positive effects on the stability and development of emerging market banking systems. (Majnoni et al., 2003) indicated that in the case of Republic of Hungary foreign banks are more eminent in product innovation, provide a broader vary of financial services and have higher screening and monitoring procedures than domestic banks. (Clarke et al, 2001) advised that if foreign bank entry is broad enough to exert competitive pressure on domestic banks, this will benefit consumers.
Cross-country regressions have found that foreign banks operation in developing countries tend to be a lot of efficient than domestic banks which foreign entry is and cause a reduction in profitability and overhead expenses of domestic banks (Claessens et al., 2001) , (Claessens and Lee, 2002: 02-22). Similar findings are reported by country case studies, tho' there's some disagreement concerning size and strength of the effects of foreign entry (Barajas et al. 2000:355-387) , (Clarke et al., 2000: 331-54, Denizer, 2000).
(Heiner schulz, 2004: 07-23) the necessary contribution of foreign banks was the advance in asset quality of Mexican banks, that accelerated the reduction of debt within the banking system. (Claessens, Demirguc Kunt and Huizinga, 2001: 22) found that foreign banks win higher profits than domestic banks in developing countries, whereas the reverse is true in developed countries.
It’s wide believed that the foreign banks, as compared to domestic banks, adopt higher management practices and possess higher organizational skill and technology know-how however consisting of these factors create the cluster of FBs a stronger performing artist than DBs in terms of efficiency and profitability. Foreign-owned non-public banks are expected to facilitate technology transfer, competition and efficiency in the banking sector of the host economy, so enhancing the efficiency of domestic savings, which can be intermediated into domestic investment.
In general, the categorization of getting each positive and negative effect suggests that the link between entry of foreign banks and gross domestic investment might not essentially be linear. It can be that gross domestic investment monotonically will increase or decrease with entry of foreign banks (Lensik, 2006: 569).
(Claessens, et al., 2001) through empirical observation inquires the impact of foreign bank entry on domestic banking businesses. They show that foreign bank entry reduces financial gain, profits & costs of domestic banks.
Foreign entry and bank competition are modeled because the reciprocal action between unsymmetrically informed principals. The entrant deploys collateral as a screening device to contest the incumbent’s informational advantage. Both fascinating information ex ante and stronger legal protection ex post are shown to facilitate the entry of low-cost outside competitors into credit markets. The new comer’s success in gaining borrowers of upper quality by giving cheaper loans will increase with its efficiency (cost) advantage. Some researcher’s accounts for proof suggesting that foreign banks tend to lend additional to massive corporations thereby neglecting small and medium size enterprises. The investigation also analysis why this determined bias is stronger in emerging markets.
In the US., banks from completely different states were long viewed as foreign and multi states has been strictly forbidden entry by banks from different states till the mid-1970s. Even banks from different cities in a state were usually strictly forbidden from opening branches in different cities within the state. It absolutely was considering, the hometown bank was domestic, and banks from anyplace else (another states within US) were foreign (Morgan and strahan, 2003: 241).
On the positive aspect, it's argued that foreign-owned banks enhance the standard, pricing and availableness of monetary services (Levine, 1996: 224-254). Directly, foreign banks give increased services and investable funds; indirectly, the banks engender competition with domestic financial institutions (Murinde and Ryan, 2001: 135–69).
This increase in competition could stimulate domestic banks to cut back costs, increase potency and increase the range of financial services, leading to e.g., lower interest rate margins and profits.
In the presence of foreign banks domestic banks are pressured to enhance the standard of their services as well as to retain their market shares. Associate extension of those arguments relates to bank efficiency spillovers, which can contribute to more efficient domestic banking practices, could facilitate to diminish costs. Foreign banks could introduce new financial services.
The introduction of those services could stimulate domestic banks to additionally enhance such new services, raising the efficiency of financial intermediation of the domestic financial set-up. It shows that the effect of foreign entry is extremely completely different in developed versus developing countries. Earlier it was investigated that foreign banks have lower profits than domestic banks in developed countries, however the other is true in developing countries.
Second, their expected results counsel that associate exaggerated presence of foreign banks results in a lower profitability for domestic banks. Not amazingly, a priority among economists and policymakers notably in emerging markets, is that foreign banks ‘‘cream-skim’’ or ‘‘cherry-pick’’, going away the worst risks to the domestic banks.
Associated issue is that foreign banks (also large domestic banks) tend to lend more to large corporations, thereby neglecting small and medium enterprises (SMEs) (Stiglitz, 2000: 437–454) , (Berger, Klapper, and Udell, 2001: 23–158). Testimonial in favor of this bias exists for the U.S. (Berger, Miller, Petersen, Rajan, and Stein, 2005: 237–269) and for developing countries like Argentina (Berger, Klapper, and Udell, 2001: 2127–2167) , (Clarke, Cull, and Martinez Peria, 2001: 02-21) realize that foreign bank entry improves finance conditions for domestic enterprises of all sizes, though larger domestic corporations profit is more.
One of the foremost striking developments in the banking sector in transition and developing countries have been the sharp increase of foreign bank entry throughout the last consecutive ten years. For example, the market share of foreign banks in Eastern Europe has gone up from on the average around 11percent in 1995 to around sixty fifth in 2003 (Claeys and Hainz, 2006: 07-27).The circumstance appearance similar in Latin America, & foreign bank entry is likewise on the increase in different emerging economies in Africa, Asia & the Middle East, Although at a slower pace (Clarke et al., 2003: 25-59).
Governments liberalize their banking markets with the intention to draw in new capital and to promote the restructuring of their usually rather inefficient banking network systems. One potential strait for the way foreign banks could foster such a restructuring method is effect from foreign to domestic banks; another potential channel might be the rise in competition (Goldberg, 2004: 02-15).
Banks differ with relevance screening talents. Foreign banks have excellent screening ability whereas, for simplicity, domestic banks within the closed economy are assumed to not have access to a screening technology.
Once the domestic banking market lending, foreign banks are given the likelihood to enter the market, either via acquisition of a domestic bank or through a Greenfield investment. Due to higher spillover effects from foreign to domestic banks, domestic banks gain access to a screening technology, although not as sophisticated as that of foreign banks. Domestic banks then have the selection to handle an investment so as to get the proper screening technology comparable to that of the foreign banks (Maria lehner, Monıka Schnıtzer, 2008: 1783-1791).
The issue of different market entry modes of foreign banks has additionally been addressed by (De Haas and Van Lelyveld in 2011: 02-11). Their studies implies that the credit provide of foreign banks remains stable throughout crisis periods within the host country which this result is especially driven by Greenfield Foreign banks.
Additionally, foreign banks could facilitate to enhance management of domestic banks, particularly if foreign banks directly participate in the management of a domestic bank, for instance in the case of a joint-venture or a takeover. (De Haas and Van Lelyveld, 2011: 02-22).
Foreign bank entrance can also contribute to a reduced influence of the government on the domestic financial sector, which can minimize the importance of directed credit policies. Several studies have examined the results of foreign banking on the domestic banking sector and also the economy as a full and mentioned the potential benefits (e.g., Levine, 1996: 224-254) , (Brealey and Kaplanis, 1996: 577-97) , (Peek and Rosengren, 2000: 30-45) , (Claessens et al., 2001) furthermore the costs related to foreign bank entry for the domestic market (e.g., Stiglitz, 199319–52), (Peek and Rosengren, 2000:45–62).
It has been empirically verified that a foreign bank of Asian origin, with a larger base and international expertise from having a lot of overseas markets can take a shorter time to enter and can survive for an extended time within in the market. Rapid growth each within the home country’s trade in Hong Kong and in the Hong Kong banking sector itself will increase the chance of entry (Leung, Young and Fung, 2008: 509). There are variety of empirical papers investigate increasing competition in the lightweight of foreign bank entry. (Claessens et al., 2001) recommend that higher competitive pressure due to foreign bank entry implies a rise in the efficiency of host country banks and thus, higher profit in economies liberalizing their banking markets.
(Clarke et al., 2006: 774–795) realize proof that foreign bank presence implies lower funding obstacles for all companies in an exceedingly market. (De Haas and Naaborg, 2006: 159-99) conclude that due to augmented competition within the marketplace for large companies, foreign banks augmented their lending activities in the phase of small and medium enterprises and in retail banking.
(Fries and Taci, 2005: 55-81) study the cost efficiency of banks in Eastern European Countries and realize that the costs of all banks are lower once the presence of foreign banks in an exceedingly country is high. These results are confirmed by (Bhaumik and Dimova, 2004: 04-14). However, (Sabi, 1996: 179 -188) finds support for the hypothesis that foreign bank entry doesn't facilitate to enhance the performance of domestic banks.
(Martinez Peria and Mody, 2004: 511-537) distinguish between Acquisition and Greenfield entry in the context of Latin America. They find evidence that the interest rate unfold of foreign banks getting into via a de novo investment is below that of banks getting into via the acquisition of a host country bank.
Additionally, their analysis realize conclusion that a better presence of foreign banks ends up in lower costs of all banks in operation within the market.The Netherlands lower levels of economic development foreign bank entry are typically related to higher costs and margins for domestic banks. At high expected levels of economic development the results seem to be less clear, foreign bank entry is either related to a decline of costs, margins and profits of domestic banks, or aren’t related to changes in these domestic bank variables (Robert Lensink & Niels Hermes, 2002).
Moreover, it's argued that the presence of foreign-owned banks tends to accelerate the method of financial system, particularly the essential supportive systems like accounting, auditing and transparency, financial regulation, and rating agencies. The presence of foreign banks is more expected to facilitate transfer of know-how in key areas like bank direction and risk management in financial institutions.
It is helpful to qualify these arguments by saying that the literature distinguishes among foreign-owned non-public banks, domestic-owned non-public banks and state-owned banks. Thus, these edges are related to foreign-owned non-public banks instead of state-owned banks (Lensink and Murinde, 2006: 571).
In many empirical studies it advised positive effects of foreign banks entrance are confirmed. As an example, during a cross-country study victimization 7900 bank observations from eighty countries for the 1988–1995 period, (Claessens et al., 2001) notice that foreign bank presence tends to cut back overall profitableness, margins as well as overhead expenses for domestic banks, and so enhance the efficiency of domestic banks. The findings of exaggerated competition and increased domestic bank efficiency are in step with the results obtained during a separate study by (Dermiguc Kunt et al., 1998) and (Gruben et al., 1999) present similar findings with reference to increased domestic bank efficiency in Argentina at mid-1990s.
In this context, foreign-owned banks (and alternative privately owned banks) contribute to more volatility of credit flows. Since foreign bank entrance may contribute to a reduced influence of the government, on the domestic financial sector, this result on the volatility of credit flows might happen directly or indirectly via the domestic banking sector.
In general, most of the critics of foreign bank entry suggest that the sequencing of any opening to foreign banks is crucial (Murinde and Ryan, 2001).The previous few years have seen a formidable liberalization of banking markets. While banks active in rather saturated, developed financial markets have hunted for new investment and growth opportunities, banks in several developing economies are in want for recent capital in the aftermath of banking crisis.
The privatization method in Eastern Europe provided more opportunities for international banks to expand abroad. Nowadays, in around four-hundredth of all developing countries, over five hundredth of banks are foreign owned. Amazingly, this figure rises to over eightieth in many Eastern European countries (Claessens et al., 2008).
(Claeys and Hainz, 2006: 07-27) analyze the impact of foreign entry on competition in the host country. In line with (Sengupta, 2007: 502–528) they assume that foreign banks have a cost advantage, despite the very fact that here in the form of a better screening technology, whereas domestic banks have an informational advantage regarding recent borrowers.
In distinction to (Sengupta, 2007: 502–528) it has been distinguish between 2 types of market entry: Greenfield investment and Acquisition. It comes behind from their analysis that the mode of entry determines the knowledge distribution between foreign and domestic banks which, in turn, affects the degree of competition.
(Claeys and Hainz, 2006: 07-27) conclude that Greenfield investment leads to more competition in the host country than acquisition.Our model builds on similar assumptions as (Dell’Ariccia and Marquez, 2004: 185-214) , (Sengupta, 2007: 502–528) and (Claeys and Hainz, 2006: 07-27) in this we have a tendency to conjointly assume an informational advantage of domestic banks and superior screening skills of foreign banks.
However, we have a tendency to don't target that foreign entry affects the host banking market and also foreign banks arrange to expand their business in abroad. Though the impact of foreign entry on host banking markets has been studied quite extensively, the enlargement of international banks and, even more, their entry mode choice has received surprisingly very little attention in the finance literature to this point. Our aim is to fill this void.
In distinction to (Sengupta, 2007: 502–528 2007) and (Claeys and Hainz, 2006:07-27) we have a tendency to expressly derive underneath that conditions a multinational bank expands via cross border lending, greenfield investment or acquisition. Our analysis sets in one step before (Sengupta, 2007: 502–528). We have a tendency to don't analyze how entry of foreign banks can be facilitated but whether or not and in which form the policy maker of the host country needs entry to take place. This permits us to derive some implications regarding the regulation of foreign bank entry (Maria Lehner, 2008:03).
(Buch and Lipponer, 2007: 805-826) and (Garc ́ıa Herrero and mart ́ınez Per ́ıa, 2007: 1613-1631) through empirical observation analyze the choice of multinational banks to expand abroad via cross border lending or via foreign direct investment, however don't expressly distinguish between greenfield investment and acquisition. They notice that the larger the host banking market, much a foreign direct investment is most popular over cross border activities.
(Van tassel and Vishwasrao, 2007: 742-3760) as well as (Beermann, 2007) came upon models to check the trade-off between Greenfield and acquisition entry. Van tassel and Vishwasrao bring that a multinational bank typically favors acquisition over de novo entry.
Beermann shows that the foremost efficient banks prefer to expand via acquisition of a host country bank whereas less efficient banks choose Greenfield entry. Globalization has brought forceful competition in the banking system in Islamic Republic of Pakistan. This competition has the tendency to bring out the best in the banking system. To stay competitive, they have the flexibility to be able to respond chop-chop with new products to fast-changing market desires. One major challenge is the way to meet the increasing expectations of customers. The retail banking system, especially, has become utterly remodeled. Previously, the branch office was the icon of retail banking.
Consumer access to the bank’s financial services and products were typically restricted to the hours during which the branch was open and in operating hours, and services and products provided by the bank were relatively restricted. The branch office, as the place wherever customers did the bulk of their financial transactions, was the principal representative of the bank. However, new competitive pressures have emerged from non-banking institutions providing similar services and products and foreign banks coming into domestic markets.
Consumers became more smart in their purchasing, less loyal and reliable to specific bank and further demanding of products and services that fit their particular financial needs and time schedules. Hence, they need achieved the position to dictate once, where when, and how can conduct their financial affairs and transactions.
To retort and acknowledge to client and market demands, it's necessary to retail bankers offer larger convenience, confidence increase accessibility of financial services and products, and deliver at a quicker pace innovative and higher contender products and services. Meanwhile, total costs of operations, financial affairs and development should be maintained or eliminate (Ehikhamenor, 2003: 13).
The increasing cost of getting informatiom domestic companies might sure foreign banks to ‘cream-skimming’, wherever they lend solely to the foremost profitable local companies (Dell’Arricia and Marquez, 2004), (Sengupta, 2006) and adversely have an effect on each domestic banks and also the companies that depend on them (Gormley, 2006).There are 3 indicators utilized in this study to find the impact of foreign banks on the domestic banks businesses in developing countries: 1) Technology, 2) Consumers Loans and 3) Customer Services. There are 2 kinds of technologies: ‘front office technology’ and ‘back office technology’.
In front office technology the banks deal directly with customers and back office technology includes services that are usually invisible to customers (Allen N. Berger, 2003: 141-176). Front office technology includes net banking, electronic payments technologies and back office technology includes info exchanges. Improved service quality and client satisfaction are shown to steer to higher productivity, multiplied loyalty, lower transaction cost, price-premium, favorable viva-voce, market share, repurchase intention, client retention and improved firm reputation (Mukherjee, Nath and Pal, 2003).
When we examine developments over time, banks from advanced countries have truly diminish regional and more international, probably owing to advances in telecommunication and alternative technologies and to economies of scale in the provision of some financial services.
Banks from emerging markets, relatively, became more regional; probably as a result of they need a stronger competitive advantage in countries physically and institutionally closer as compared with banks from advanced countries.
Technology is giving necessary competitive advantage. In recent years, banks are investing a lot of technology, not solely as a way to cut back costs and improve operations, however presumptively additionally as a key to profitability.
With technology, banks are able to improve on their management of customer relationships, contour operations, expand their activities, improve services and minimize risk exposures in a very turbulent market. Software package resolution helps to optimize branch delivery through facilitating the look of recent sites, relocations and closures supported a bunch of elaborated knowledge, like population demographics and density.
The Internet cash management service permits businesses to access balance and payment data, print statements and transfer cash between accounts via a bank’s data processor. Cavano noted that with the arrival of the web, speed had begun to overtake trust in client relationships, and innovation had surpassed tradition, forming a replacement paradigm – the digital economy. He warned that banks that haven't unbroken pace with the most recent technology would discover that they'll not deliver the data or services demanded by the new digital economy.
Considering the crucial role that technology is taking part in the banking industry, Mark Hill suggested that technology ought to be treated like every investment in a bank’s future success, that the investment must be planned an instituted in stages, that it ought to mirror long-run business strategies and have the commitment of bank executives, which it ought to be expected to produce a return on investment.
The banking sector is truly an older time beneficiary of the offerings of technology. According to (Grainger Smith and Oppenheim, 1994) technology has contended a central role in the development of the banking industry like; banks aren't contrary to the popular image, primarily in the cash business. They’re in the data business. Their primary activities are the capture, distribution, analysis, and process of financial data.
Technology is that the second largest fixed cost incurred by banks when personnel. It’s enabled banks to widen the vary of services offered to their customers and remodel their operational systems. It’s additionally enabled banks to extend the degree of their services, operate at the next level of potency and notice economies of scale.
The western world has continued to dominate the world of technology and set the pace in the transformation of the world economy. The banking industry has in the last decade been characterized by increasing investment in technology. As an example, in 1992, U.K. recorded an average expenditure of 8.5 million Pound per financial institution. The level of investment in technology by American financial institutions was thought-about to be higher, representing regarding 20 percent of their total expenditure on fixed costs (Smith and Oppenheim, 1994).
Another example of the union of mobile banking and ATM technology was undraped at the start of August 2011, once Kuveyt Türk launched a replacement service referred to as Gold Send.
The service consists of mobile applications that permit users to withdraw gold from the bank’s ATMs and branches, employing a mobile device. whereas it had been doable to use an ATM to withdraw gold in Turkey since the launch of the application meant that users could SMS a code to a loved one or friend elsewhere within the country or even from abroad, permitting them to withdraw the gold themselves while not essentially having a checking account of their own. Kuveyt Turk declared the financial statement of 2013,total assets of the banks increased 16.8 percent and net profit became 146 million TL in the middle of 2013.It seems that presently bank growing steadily because of their efficient system.
The project was additionally notable for the approach it acknowledged ancient Turkish society and also the high status it still attaches to gold, and also the prevalence of mobile phones in Turkey. Meanwhile, Turkey’s financial establishments have also embraced different separate trends, like the increase of social media. (Elliott Holley, 26 November 2013).
Fundamentally the year 2013, was undoubtedly a failure year for Turkish banks. This reason can easily be described through numerical data.
illustration not visible in this excerpt
FIGURE-2.1, TURKISH BANKS RETURN ON EQUITY RATIO STATISTICAL DATA
Source: Turkish marketnews.com, Monday 13 January 2014.
Here the above graph shows the decrease of profit for Turkish banks. The period between 2004 to 2010 is looking zenith with the average return on equity ratio 18 percent. After 2010, we can see it has not been increased above 15 percent. By looking above figure, we can say that Turkish banks are not attractive for investors. Comparing to other emerging market banks, how do Turkish banks do well? The answer is not clear for them. In Turkey the banking industry is really underperformed compared to other sectors i.e., Telecommunication, Automobiles, with ROE about 25%.
Generally the insufficient profit is not only the one reason, also low capital adequacy ratio telling an ugly story.
illustration not visible in this excerpt
FIGURE-2.2, TURKISH BANKS CAPITAL ADEQUACY RATIO STATISTICAL DATA
Source: Turkish marketnews.com, Monday 13 January 2014.
Generally the Turkish financial sector has been known for its reassuring capital structure. The asset quality does not seem very good since past few years. According to economic analysis’s , Turkish Banks could rollover their banking industry by investing in new technologies, collective investment schemes, expand working capital within their own company, make acquisitions, bringing new investors together in case of capital need, and making restrictions for acquisitions and mergers for foreign banks.
By mid-1990s, British banks had introduced a good vary of specialized technologies in advance banking sector. Of particular interest at that point was the loaning consultant code that helped financial establishments in codifying their data of their business.
Australian banks were equally increasing their technology investment (Freeman, 1996). For many years starting from 1995, the annual expenditure on the upgrading of technology and introduction of recent services was $1.95 billion. The calculable expenditure for 1998 was $2.1 billion. Then the banks were entering into smartcards and investing increasingly in Internet-based transactions.
By the year 1998, financial institutions in the West were spending between 7% and 15% of their revenue on technology (Caldwell,1998).The transformation of the banking sector by technology in the West and East Asia has become the normative course on that the banking sector in the third world is anticipated to maneuver.
For over a decade, the third world has, in fact, been warned to require advantage of the revolutionary advances in technology to strengthen economic and social changes if to have a place in global socio-economic relations that are progressively dominated by the growing information economy.
Some recent reports suggest that technology and online banking have given some banks a foothold in the extremely competitive market, and also the more progressive banks have outstripped others. In 1998, the top five of such banks ranked in terms of profit after tax were Citibank, Union Bank, First Bank, Zenith, and United Bank for Africa (African Business, 1998).Continuous innovation is seen as the core of promoting models in developing countries.
- Quote paper
- Muhammad Mehtab Azeem (Author), 2014, Impacts of foreign banks on domestic banks businesses. Overall case study on developing countries, Munich, GRIN Verlag, https://www.grin.com/document/275454
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