Effects of Foreign Bank Entry on Technical Efficiency of a Bank Sector – The Case of Ghana

Abstract: ABSTRACT The purpose of this research is to analyze the effects of the entry of foreign banks on the technical efficiency performance of the domestic banking sector over the period 2000 - 2008. This study uses a sample of 23 banks (3 state banks, 9 private domestic banks and 11 foreign banks) and a two-stage approach for the data analysis. The researcher first uses the Data Envelopment Analysis (DEA) approach to estimate technical efficiency scores of all 23 banks used in research. The results indicate that banking technical efficiency performance of the banking industry has been fluctuating over the study period. To investigate the effect the entry of foreign on the domestic bank, we run a Tobit regression. The regression focuses on the determinants of technical efficiency of the domestic banks, using variables like return on assets, liquidity ratio, inflation, etc. In this same regression, a proxy labelled as foreign share is added as one of the independent variables in order to help us test how the entry of the foreign banks has affected the domestic banks. The study suggests that factors which affect the technical efficiency of domestic banks in Ghana include return on assets, liquidity ratio, bank capitalization, and concentration/competition. The findings further suggest that the domestic banks have been positively affected by the entry of the foreign banks. The implication of this is that the domestic banks are probably cashing in on the benefits such new technologies and know-how, new processes and practices, etc. foreign banks provide when they enter any economy. Hence, the policy implication is for Bank of Ghana to continue to encourage profitable foreign banks to come into Ghana. The ultimate beneficiary would be the final consumer because they stand to benefit from improved services and service delivery, competitive/low prices.