Where have Foreign Banks in Nigeria Gone? Market Structure, Competitive Intensity and the Capabilities of Nigeria Banks

Abstract

Privately-owned Nigerian banks hold 94% of Nigeria banking assets, the world's second largest share of local ownership. Theoretical explanations for the dominance of local firms related to liabilities of foreignness do not explain this phenomenon, suggesting that foreign banks do not experience additional costs compared to local Nigerian banks. In search for explanation for this puzzle, we focus on market structure and competitive intensity and their impact on capability development. In-depth exploratory study of Nigeria banking industry, based on interviews with industry experts and practitioners and supplemented by secondary data, suggests that the regulatory approach towards both foreign and Nigerian banks instilled market structure and competitive dynamics that were conducive for the development of competitive capabilities by Nigeria banks, whose strength arrested foreign entry. The study throws light on a regulatory approach that incentivizes capability development via discipline imposed by markets rather than by direct government intervention in the form of protectionism or favorable resource provision. It highlights the merits of studying phenomena that are inconsistent with existing theories for theory extension and development.

Keywords: foreign and domestic banks, government policy, institutional environment, firms’ capabilities, liability of foreignness, Nigeria banks

JEL Classification: M16, L1, L22, G18, G21