Does foreign bank entry contribute to financial development? Examining the role of income thresholds

Abstract

This article examines the relationship between foreign bank entry and financial development in a panel framework covering 57 emerging market and developing economies (EMDEs) between 1995 and 2009. Using various measures of financial sector deepening, the article also explores the degree to which the relationship between foreign bank entry and financial sector depth varies by different income thresholds of the EMDEs. The empirical findings suggest that while foreign banks have a direct positive impact in furthering financial depth, the marginal effects of foreign bank entry diminish over time with greater levels of economic development. In other words, the impact of foreign bank entry tends to diminish as the per capita income of the country rises.

The effects of foreign bank presence on financial development in Africa: The role of institutional quality

“…The extant literature on foreign banks mostly focuses on financial depth and financial inclusion as measures for financial development. Similar studies by Gopalan (2018) and Azmeh (2018) used a single indicator like private sector credit, while Kebede et al (2021) used the financial inclusion indicators as independent measures for financial development. Although extant literature has used different indicators as alternative measures of financial development, an index that captures financial sector deepening, equity market, and well‐capitalized bond market has been scanty or ignored in the literature (Gopalan, 2018; Sahay et al, 2015; Svirydzenka, 2016).…”

“…Similar studies by Gopalan (2018) and Azmeh (2018) used a single indicator like private sector credit, while Kebede et al (2021) used the financial inclusion indicators as independent measures for financial development. Although extant literature has used different indicators as alternative measures of financial development, an index that captures financial sector deepening, equity market, and well‐capitalized bond market has been scanty or ignored in the literature (Gopalan, 2018; Sahay et al, 2015; Svirydzenka, 2016). In addition, these studies focused solely on a single indicator for measuring financial development, leading to inconclusive outcomes.…”

“…The extant literature on foreign banks mostly focuses on financial depth and financial inclusion as measures for financial development. Similar studies by Gopalan (2018) and Azmeh (2018) used a single indicator like private sector credit, while Kebede et al (2021) used the financial inclusion indicators as independent measures for financial development.…”

“…Although extant literature has used different indicators as alternative measures of financial development, an index that captures financial sector deepening, equity market, and well-capitalized bond market has been scanty or ignored in the literature (Gopalan, 2018;Sahay et al, 2015;Svirydzenka, 2016). In addition, these studies focused solely on a single indicator for measuring financial development, leading to inconclusive outcomes.…”

“…This is because using just a single indicator of measuring financial development is inadequate since the financial sector has been multidimensional in this twenty-first century. For instance, banks were the main actors in the financial sector, currently, other non-bank financial entities such as mutual funds, insurance companies, venture capitalists, pension funds, and private equity firms and among others are also relevant in playing a role in the financial sector (Gopalan, 2018;Sahay et al, 2015;Svirydzenka, 2016). This suggests that the financial system is evolving in different ways, hence, it will be expedient to use a number of indicators, which supersede the traditional indicators of measuring financial development (see, Svirydzenka, 2016).…”