Does Financial Liberalization in Developing Countries Effect Welfare

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DOES FOREIGN BANK PENETRATION
IN DEVELOPING COUNTRIES AFFECT
THE WELFARE LEVEL?

Table of contents
Table of contents

2

Chapter 1: Introduction

3

Chapter 2: Literature review

5

2.1 Bank entry in General

5

2.2 Regulation

6

2.3 Drivers foreign bank entrance

8

2.4 Economic growth as result of foreign bank penetration

10

2.5 Developing economies, economic growth and poverty effects

11

2.6The case of the Philippines

14

Chapter 3: Methodology and data

18

Chapter 4: Descriptive statistics

22

Chapter 5: Results

27

Chapter 6: Conclusion and Discussion

29

List of references

31

2

Chapter 1: Introduction
In developing countries the foreign banks have higher profits than the domestic bank (Claessens et al. 2001). Micco, Panizza, and Yanez confirmed this and stated that foreign banks are both more profitable and more cost efficient than domestic banks (2004). The entry of foreign banks in the banking sector of developing countries have proved to a possibility for restructuring the banking sector in a more efficient and competitive sector(Clarke et al. 2003). The Banking market reacts to the entry of foreign banks in two steps. In the short run the profits and the margins of the domestic banks are reduced, with the possibility of the bankruptcy. In the long run the national banking market functioning is improved, this has positive welfare indications for the bank consumers. (Claessens et al. 2001). The effect of a growing economy due to a better functioning banking sector raises total lending, cost efficiency and welfare, but this effect is not warranted (Detragiache et al. 2008).

The entry of foreign banks also affects the access to credit. The expectation was that the entry of foreign banks would harm the access to credit for small- and medium enterprises because foreign banks are considered to be mainly large international firms and therefore have a strict policy concerning credit lending. For small- and medium enterprises in developing countries it would be harder to get credit for they are unable to satisfy the strict policy of these firms. This has proven to be wrong, on contrary the foreign banks appear to be interested in local lending to opportunities in developing the economy, even more as they do so in developed countries. The remark hereby is that although small- and medium enterprise benefit, the positive effect on larger companies is stronger (Clarke et al. 2003). All studies on the subject of foreign banks show that their entry and their presence influence the market and thereby the economy. Although in the discussion over the effects on the economy it is clear that it leads to 3

growth of the economy, for instance close to all studies show a raise in GDP in the host country. But how is the increase of the GDP distributed in developing countries? Because in those countries the welfare level desires strongly for positive influences. So the main question is: does foreign bank penetration in developing countries affect the welfare level in those countries?

4

Chapter 2: Literature review
2.1 Bank entry in General
Bresnahan and Reiss (1987) show entry on a local level is mainly determined by the expected profitability of the market, the concentration in the market, the entry barriers and the efficiency of the existing companies. Whereas the last reason is assumed to become increasingly more important in larger markets. Entrance in the specific sector of banking is likely to be complex due to the significant role of trust of consumers, strongly influenced by familiarity with the provider of the financial products. Furthermore there are strict regulations in this market and a fairly high starting capital is needed. A thoughtful policy is demanded before bank entry in a region or country. In the most western countries the domestic banking sector is dominated for decades by a few large banks, because people do not easily...
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