Foreign Banking in Developing Countries; Origin Matters

25 Pages Posted: 27 May 2006 Last revised: 10 Oct 2011

See all articles by Neeltje van Horen

Neeltje van Horen

Bank of England; Centre for Economic Policy Research (CEPR)

Date Written: May 2006

Abstract

Driven by globalization and increased financial integration, the last decade has seen many foreign banks entering developing countries. Although the majority of these banks are from high-income countries, recently banks from developing countries have followed suit. This paper looks at this phenomenon, by examining the differences and similarities between developing and high-income country foreign banks. Using a large dataset on banking sector FDI in developing countries, we find that 27 percent of all foreign banks in developing countries are owned by a bank from another developing country, while these banks hold 5 percent of the foreign assets. The importance of developing country foreign banks is much larger in low-income countries (both in number of banks and in terms of assets) and this type of foreign banking is strongly regionally concentrated. Although foreign bank entry by both developing country as well as high-income country banks seems to be driven by economic integration, common language and proximity, banks from developing countries are more likely to invest in small developing countries with weak institutions where high-income country banks are reluctant to go. This result seems to suggest that developing country banks have a competitive advantage dealing with countries with a weak institutional climate. Furthermore, our results indicate that developing country foreign banks have a higher interest margin and are less profitable than foreign banks from high-income countries.

Keywords: foreign direct investment, international banking

JEL Classification: F21, F23, G21

Suggested Citation

van Horen, Neeltje, Foreign Banking in Developing Countries; Origin Matters (May 2006). Available at SSRN: https://ssrn.com/abstract=904659 or http://dx.doi.org/10.2139/ssrn.904659

Neeltje Van Horen (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://www.bankofengland.co.uk/research/Researchers/neeltje-van-horen

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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