Academic journal article The International Journal of Business and Finance Research

The Effects of Foreign Bank Entry on Financial Performance of Domestic-Owned Banks in Ghana

Academic journal article The International Journal of Business and Finance Research

The Effects of Foreign Bank Entry on Financial Performance of Domestic-Owned Banks in Ghana

Article excerpt

ABSTRACT

This article empirically examines the effects of foreign bank entry on the financial performance of Merchant Bank Ghana Limited (MBG) and Ghana Commercial Bank Limited (GCB) in Ghana from 1975 to 2008. The most consistent result from the pooled regression was that foreign bank entry increased domestic banks' return on assets for the period 1992-2008; a period with a high influx of foreign banks into Ghana. This result supports studies by Beck, Demirgüç-Kunt, and Levine (2006) and Boldrin and Levine (2009) that found foreign bank entry improved domestic banks' profitability margins. In addition, liquidity had a relatively larger multiplier effect on domestic banks' return on assets for the period 1975-1991 than any other independent variables in the study. The presence of foreign-owned banks was not detrimental to the financial performance of domestic-owned banks in Ghana.

JEL: E4; F2; G28

KEYWORDS: Capital Adequacy Ratio, Emerging Market Economies (EMEs), Foreign Bank Entry, Domestic-owned Banks, Liquidity, Pooled Regression Analysis, Return on Assets.

INTRODUCTION

The entry of foreign owned banks to operate banking services in emerging market economies (EMEs) is not a new global phenomenon (Domanski, 2005). The entry of foreign owned banks into the domestic banking market of EMEs increases the financial performance of the indigenous banking industry (Beck, Demirgüc-Kunt, & Levine, 2006; Boldrin & Levine, 2009). The World Bank's policies encouraged competition as increased competition tends to reduce operating costs that result in increase in profits (Demirgüc-Kunt & Levine, 2008).

The decision by EMEs to allow increased international financial competition could be explained by the standard theories of financial liberalization and technology spillover (Gormley, 2007; Stein, 2010). The entry of foreign banks has affected financial performance of the domestic-owned banks in Ghana (Boldrin & Levine, 2009; Buchs & Mathisen, 2005; Kalium & Bhat, 2009). The banking problems and benefits resulting from foreign bank entry on the financial performance of domestic-owned banks depends largely on the country in question (Briones & Villela, 2006).

This study closes the gap in the empirical literature by examining foreign bank entry on the financial performance or profitable operations of domestic-owned banks in Ghana. Foreign-owned bank entry on domestic-owned banks was modeled by using a generalized banking operating efficiency function. To analyze the effects of foreign bank entry on the financial performance of domestic-owned banks in Ghana, a bank profitability model using capital adequacy, liquidity, and a foreign-bank entry dummy variable is employed (Derviz & Podpiera, 2008; Girard, Nolan, & Pondillo, 2010). This study has three main objectives: First, it tries to find a significant relationship between capital adequacy, liquidity, and a foreign-bank entry dummy on the return on assets (ROA) of two domestic-owned banks in Ghana, Merchant Bank Ghana Limited (MBG) and Ghana Commercial Bank Ghana Limited (GCB), from 1975 to 1991. This period marked limited entry of foreign banks into Ghana with foreign banks accounting for 33% of the banks in Ghana (PricewaterhouseCoopers, 2009).

Second, we try to find significant relationship between capital adequacy, liquidity, and a foreign-bank entry dummy on the ROA of the two domestic banks from 1992 to 2008. This period is characterized by a high influx of foreign-owned banks into Ghanaian banking system. This period involved a net increase of 16 banks, 10 or 63% of banks in Ghana were foreign-owned (PricewaterhouseCoopers, 2009).

Third, we attempt to find a significant relationship between capital adequacy, liquidity, and a foreignbank entry dummy on the ROA of the domestic banks from 1975 to 2008. This period marked the cumulative effect of the sub-periods: before (1975-1991) and during (1992-2008) the entry of foreignowned banks into Ghana. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.