Foreign Bank Entry and Economic Growth: Implication for Ethiopia from Sub- Sahara African Countries

Abstract

The study provides a general overview of the banking environment and direct and indirect links between foreign bank entry and economic growth in Sub-Sahara African countries using descriptive statistics and Generalized Method of Moments dynamic panel system estimator. The descriptive evidence suggests that opened countries have better banking service access, depth and competition than restricted countries. Similarly, Ethiopia as one restricted country, performed very low in bank penetration, depth, efficiency and competitiveness as compared to banks opened in Sub-Saharan African countries. The two sets of regression equations are estimated for: (a) direct effect of foreign banks and (b) indirect effect of foreign banks on economic growth. A system Generalized Method of Moments estimation result for direct effect of foreign bank asset share shows that in each case, the sign of the foreign bank asset share is positive and statistically significant. These results are important to show that foreign banks play a significant role in improving economic growth and also foreign banks asset share indirectly increases economic growth through improving efficiency. However, the foreign banks asset share has showed negative sign on Z-score indicating that foreign bank share reduces economic growth indirectly through increasing banking instability in Sub-Saharan African countries such as Ethiopia. Thus, the results may suggest the policymakers to remove liberalization restrictions on foreign banks and to regulate them to be disciplined.