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FDI inflows and bank deposits: evidence from 18 MENA economies

Abdulazeez Y.H. Saif-Alyousfi (Department of Finance, College of Business Administration, University of Hafr Al-Batin, Hafr Al Batin, Saudi Arabia and Department of Finance and Banking, Faculty of Administrative Sciences, Taiz University, Taiz, Yemen)

Competitiveness Review

ISSN: 1059-5422

Article publication date: 13 May 2021

141

Abstract

Purpose

This paper aims to examine and compare the impact of foreign direct investment (FDI) inflows on bank deposits in aggregate as well as at the level of conventional and Islamic banks in Middle East and North Africa (MENA) countries. The study also tests hypotheses of direct and indirect impacts of FDI flow and FDI stock on bank deposits.

Design/methodology/approach

Static and dynamic panel generalized methods of moments (GMM) estimation techniques are applied to analyze a large data set of 491 commercial banks (422 conventional banks and 69 Islamic banks) across 18 MENA countries between 1993 and 2017 (12,275 year observations).

Findings

Empirical results indicate that inflowing FDI flow and FDI stock have a significant negative direct impact on deposits of MENA banks. The results lend support for the direct channel hypothesis for the effect of FDI on bank deposits and find no evidence in support of the indirect channel hypothesis. FDI inflows affect bank deposits directly via increased FDI-related excessive competition in the banking market. Deposits from conventional banks appear to be more affected than those from Islamic banks. The variation may due to the fact that Islamic banks have fewer multinational corporations (MNC) customers than conventional banks and therefore are less sensitive to fluctuations in FDI.

Practical implications

From this analysis, this study concludes that foreign investments have a higher productivity than local investments in MENA region. Attracting more FDI is aimed at increasing overall national productivity through competition. However, governments would be wise to enact such a policy to maximize benefits and minimize potential harm to local industry. Furthermore, FDI policy should encourage small to medium-size banks and firms (SMEs)’ participation and linkage with multinational banks and MNCs, while upgrading research and development institutions and innovation activities to help SMEs to benefit from potential spillovers from foreign presence in the industry. In addition, the linkage and connection between SMEs and foreign firms should be strengthened and promoted by government policy.

Originality/value

This study is the first of its kind to examine the effect of FDI inflows on bank deposits. It also provides an in-depth quantitative analysis of the impact of FDI flow and FDI stock, separately, on bank deposits for both conventional and Islamic banks. It distinguishes between direct and indirect channels through which FDI inflows may affect bank deposits. The study analyzes 25 years of panel data for 491 banks (12,275 year observations) and uses both static and dynamic panel GMM estimation techniques to analyze the data.

Keywords

Acknowledgements

Special thanks go to the anonymous referees as well as to Prof Dr Philippe Gugler (Editor, Competitiveness Review) for the useful comments that significantly improved the paper.

Citation

Saif-Alyousfi, A.Y.H. (2021), "FDI inflows and bank deposits: evidence from 18 MENA economies", Competitiveness Review, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/CR-05-2020-0078

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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