Does foreign banks entry influence domestic banks' efficiency? Evidence from Ghana

Abstract

The study investigates the effect of foreign bank entry on the efficiency of domestic banks in Ghana. The study applies the Stochastic Frontier Analysis (SFA) technique and the system Generalized Method of Moments (GMM) estimator on bank specific level data, spanning the period 2000 to 2015. The results show that foreign banks with an average profit efficiency of 74.7% are more profit efficient than domestic banks with a score of 71% which conforms to the global advantage hypothesis. This suggests that foreign banks are able to maximize revenue through the generation of interest income on loans and investments better than domestic banks due to the foreign banks' comparative advantage in terms of international expertise. Further, the system GMM results indicate that the entry of foreign banks has contributed to the profit efficiency of domestic banks in Ghana. This positive spillover effect of foreign banks is manifested in their transfer of international expertise, technological knowledge, quality banking services and competitive pressure to domestic banks. In addition, bank size and liquidity are essential determinants of the profit efficiency of domestic banks in Ghana. The findings of the study imply that bank regulators in developing countries should push for reforms that eliminate implicit and explicit barriers that may hinder the entry of foreign or new banks.