The role of foreign banks in impacting the behavior of domestic banks has been a relatively unaddressed topic in the literature. Employing bank-wise data on MENA countries during 2000-2012, the purpose of this paper is to examine how the behavior of foreign banks impact domestic bank performance. For this purpose, the authors focus on not only their profitability and stability, but also on broader numbers such as loan portfolio and funding costs. In addition, the authors also explore the impact of foreign banks on the growth of domestic economies and its implications for the allocation of capital and labor.
The authors employ the dynamic panel data methodology as compared to alternate techniques owing to the ability of this technique to effectively address the endogeneity problem of some of the independent variables.
The results suggest that foreign bank presence exerts significant spillover effects. At the same time, increased foreign banks appear to impel domestic banks to cut back lending. As regards its impact on growth, the results indicate that although labor does not exert any discernible impact on GDP growth, capital exerts a positive impact on output when foreign bank penetration is high, supportive of the real effects of foreign banks.
To the best of the authors’ knowledge, this is one of the early studies for MENA countries to examine this issue in a systematic manner. Most studies of this genre focus on a limited set of banks/countries, thereby limiting their empirical evidence. By focussing on an extended sample of MENA country banks covering an extended period that subsumes the financial crisis, the analysis is also able to shed light as to how foreign presence impacts domestic bank performance.
A part of the work was done when the author was with the Qatar Central Bank in Doha, Qatar. I would like to thank, without implicating, an anonymous referee for the insightful comments on an earlier draft, which greatly improved the exposition and analysis. Needless to state, the views expressed and the approach pursued in the paper are entirely the author’s personal opinion.
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