Download The impact of foreign entry in the banking sector

Brunel Business School – Doctoral Symposium 4th & 5th March 2010 Student First Name: Ernest
Student Second Name: Asimenu
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Brunel Business School – Doctoral Symposium 4th & 5th March 2010 “The impact of foreign entry in the banking sector in the SSA
Region: The case of Ghana”
Abstract
The study examines the impact of foreign entry in the banking sector in the SSA
region with a special emphasis on Ghana. This study stems from the curiosity of
the researcher to understand Foreign Direct Investment (FDI) in Ghana and how
local and national banks have coped with the influx of foreign banks in the
country. More specifically, the thesis will examine the impact of foreign direct
investments in the banking sector. The current study aims to fill the gap in the
area of the foreign entry impact in banking providing a new model for FDI
decision-making process in banking. The model comprises the theories related to
FDI and other theories in International Business.
Keywords: Foreign Direct Investment (FDI), Banking, Ghana and Globalisation
1.
Introduction
A well functioning financial and banking system is undoubtedly one of the most
important developmental drives of economic growth in a country. This is even more
significant for the economies that have adopted the International Monetary Fund (IMF) and
the World Bank assisted Structural Adjustment Programmes (SAP) aimed at reversing many
years of economic decline and eventually promoting economic growth through enhanced
trade liberalisation. Financial deregulation, developments in telecommunication and IT
technology and globalisation of capital markets are benchmarks which have encouraged
foreign direct investments (FDI) inflows in the banking sector in recent years (Moshirian,
2001). In the past few years, the expansion of banking across frontiers has been explosive.
1 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 The entry of foreign banks is expected to increase competition and the level of service
available in host countries. On the other hand, it is essential for host nations to protect local
banking interests for fear of complete foreign domination.
2.
Research Aims and Objectives (WHAT?)
This study aims to broaden the understanding of financial markets’ liberalisation and
the impact on the Ghanaian economy. Specifically, the objectives of this research are
twofold. First, it evaluates the impact of contextual issues derived from the implementation of
SAP in Ghana during the period 1983–2008. Second, it examines the extent of the rapid
inflows of FDI in the Ghanaian banking sector. To meet the research aim and objectives this
study is guided by the following research questions:
•
How have the economic, social, political, legal and competitive environments been
transformed since regulatory reform process in 1983 in Ghana?
•
Why are investors keen to invest in Ghana and what are the expectations of foreign banks
entering Ghana?
•
How do the initial and post entry strategies of foreign banks differ and what are the
reasons for their differences?
•
3.
How has the world recession affected the flow of FDI into Ghana?
Educational and Practitioners Benefits
The author believes that this research is important in two ways. First it contributes to
the literature by filling the research gap since little or no work has been done in this area.
Second, the author believes that this study would be useful to researchers, practitioners,
academics, policy makers, existing business organisations, and provide useful information to
foreign investors planning to operate in Ghana. This research is structured as follows:
2 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 The first part introduces the thesis and sets out the main aims and objectives. The second part
includes three literature review chapters which frame the design of the research instrument;
Part three will discuss the summary of the research methods. Part four includes the empirical
results chapter. The final part sets out the discussion of the results which includes the
conclusions and the limitation of the thesis.
4.
Literature on Foreign Direct Investment (FDI)
FDI is sometimes thought of as originating from American firms (Lipsey, 2001).
Nonetheless Wilkins (1970) argue this goes far back to 2500 BC, when Sumerian merchants
found in their foreign commerce that they needed men to be based abroad to receive, store
and to sell their goods. In the mid seventeenth century, English, French, and Dutch mercantile
families sent relatives to America and the West Indies to represent their families. In time
American colonist found their own foreign trade and that it was enviable to have
correspondents, agents etc in important trading centres to sell American exports.
In conceptualising the journey of FDI from the past to the present, it is important to
look at how FDI in the world economy has contributed to world production and employment
today. According to United Nations (2000b) in the late 1950’s when a large stock of FDI was
owned by US firms, International production might have represented about 2% of the world
output, by the late 1970’s to early 1980’s this had reached 5%. As US firms operations
abroad reduced in the 1980’s countries such as Germany and Japan increased. By the late
1990’s when growth picked up the world wide production was up at 8%.
According to the IMF (International Monetary Fund) and OECD (Organisation for
Economic Cooperation and Development) definitions direct investment as a category of
international investment reflects the objective of a resident in one economy (the direct
3 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 investor) obtaining a lasting interest in an enterprise resident in another economy (the direct
investment enterprise). The lasting interest implies the existence of a long-term relationship
between the direct investor and the direct enterprise and a significant degree of influence by
the investor on the management enterprise. Direct investment has a combination of
relationship building between the investor and all the enterprises involved.
To understand why banks invest abroad Grubel (1977) explains this by using the
“follow-the-customer” hypothesis. The modern view of this hypothesises emphasises the
active role of banks in the host country banking sector, banks apply their comparative
advantage in management technology and marketing know how in foreign countries at next
to no marginal cost.
Clarke et al (2003) studies that the link between foreign entry with other foreign direct
investment are often seen as supporting the argument that banks follow their customer’s
abroad. The globalisation debate makes it easier for others to follow as failure to follow the
customer may make others to make inroads on capturing the domestic market. According to
authors such as Balough and Scaperlanda (1983), Karvis and Lipsey (1992), Mody and
Wheeler (1992) and Mody and Srinivasan (1998) they argue that the host country market size
plays an important role in attracting FDI, especially when the host country market allows the
development of economies of scale for import substituting investment.
5.
Background Information on the Ghanaian Banking Sector (WHERE?)
Amidst the global recession and domestic growth slowdown in the past couple of years,
the Ghanaian Banking sector has witnessed a phenomenal growth in FDI inflows. BobMilliar (2007) et al claim that the banking sector in Ghana has emerged from a severe
financial and reputational damage resulting from economic recession and government debt
4 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 during 1980’s and 1990’s, to a more enviable and a rapid growing sector in the economy. The
recent growth of the banking sector is primarily due to the deregulation of the banking sector,
economic and political stability, and the government’s private sector initiatives, making the
sector not only a business-friendly environment to attract significant foreign capital injection
but also the “financial hub” of the Sub-region. The Bank of Ghana 1 has endorsed the
enforcement of statutory requirements, more stringent supervision and the licensing of capital
requirements. The bank of Ghana has licensed 27 banks; these include a range of nonfinancial institutions, including several community Banks established to mobilise rural
savings (Appendix 1 shows a list of Banks in Ghana). A quite remarkable feature of the
sector is the level of ownership by the private sector, directly or through the capital market
when compared with the level of state ownership seen in other financial sectors in other
African countries (Bob-Milliar et al., 2007).
The overall banking sector according to BMI (2009) is relatively sound, albeit subject
to greater risk than previous years. This milieu signifies the continuation of the following
trends; with the expectation in the increase in the population of Ghana, it is envisaged more
bank branches will be opened to formally accommodate the proportion of the unbanked
population. In March 2009, there were 642 branches, up by 32.1% y-o-y from 486 in the
previous 12 months (BMI 2009).
6.
Research Methods (HOW?)
The data on which this study will be based will be collected from both primary and
secondary sources in Ghana and online. Data will be gleaned from books, periodicals,
newspapers and journal articles. The official documents that are to be used in this study will
1
Bank of Ghana would be referred to as BoG 5 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 be obtained from public sources including official documents from Ghana Central Statistics
Office (CSO), Institute of Statistical, Social and Economic Research (ISSER), Ghana Export
Promotion Council (GEPC), Ghana Investment Promotion Council (GIPC), the World Trade
Organisation and the International Monetary Fund. These documents will be used to uncover
patterns, policies, and developments in the banking sector.
The comparative element of the study across different groups of banks enables the
research to provide greater insight into the behavioural differences between domestic and
foreign banks. While many authors focused on empirical examination of foreign bank entry
effects only a few researchers centre their attention on qualitative assessment and scarcely
has anyone attempted to combine both methods. Using both qualitative and quantitative
research methodology enables triangulation of the results and further providing substantial
evidence of the findings. Inductive research approach proves to be complementary to the
initial deductive approach where results of statistical analysis are corroborated with findings
of semi-structured interviews. The character of the research allows for enough flexibility so
that rigorous empirical analysis provides explanatory results of between group differences
while more open interview based research offers explanatory as well as exploratory findings.
7.
Conclusion
Despite the increased globalisation in the provision of financial services, economist
have found it difficult to present to policymakers with compelling empirical evidence of the
impact of foreign entry in SSA region. This stems largely from a lack of comparable data and
the modest level of foreign entry that has occurred until recently. However this study
promises to channel a new orientation in the development of Ghanaian macro economic
6 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 framework in both fiscal and monetary policies areas. Fiscally the study shall dwell on FDI as
a source of revenue to achieving balance of trade equilibrium.
7 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 References
Balough, R.S., and Scaperlander, A (1983), “Determinants of U.S. Direct Investment in the
EEC”, European Economic Review, 21, pp. 381-93
Bank of Ghana Quarterly Bulletin April - June (2009) www.bog.gov.gh Accessed on
06/02/2010
Bob-Milliar, G.K and George, M Developments in The Ghanaian banking sector
www.Ghanaweb.com Accessed on 17/01/2010
Business Monitor International (BMI) (2009) The Ghana Business Forecast Report Q4
Clarke, G; Cull, R; Peria; M.S.M and Sanchez S.M (2003) Foreign Bank Entry: Experience,
Implication for Developing Economies, and Agenda for Further Research. The World Bank
Research Observer pp 25-59
Dages, G. B., Goldberg, L. and Kinney, D. (2000), `Foreign and Domestic Participation
in Emerging Markets: Lessons from Mexico and Argentina', FRBNY Economic Policy
Review, September 2000, pp. 17-36
Demirguc-Kunt, A. Levine, R. and Min, H. G. (1998), `Opening to Foreign Banks: Issues of
Stability, Efficiency and Growth', mimeo, Washington D. C.: World Bank
Glaessner, T. and Oks, D. (1994), `NAFTA, Capital Mobility, and Markets Volatile? '
mimeo, Washington, D. C.: World Bank
Grubel, H.G (1977), `A theory of multinational banking', Banca Nazional del Lavoro
Quarterly Review, No. 30, pp. 349-364
Kravis, I.B., and Lipsey R.E (1992), “Source of Competitiveness of the U.S. and of its
Multinational Firm,” Review of Economics and Statistics, 74, 193-201
8 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 Levine, R. (1996), `Foreign Banks, Financial Development and Economic Growth', in
C. E. Barfield (ed.), International Financial Markets: Harmonization Versus
Competition, Washington D. C.: AEI Press
Lipsey, R.E (2001) “Foreign direct investment and the operations of Multinational firms:
Concepts, History and Data. National Bureau of Economic Research
Mody, A., and Srinivasan, K (1998), “Japanese and U.S. Firms as Foreign Investors: Do they
March to the Same Tune?” Canadian Journal of Economics, Vol. 31
Mody, A., and Wheeler, D (1992), “International Investment Location Decision: The Case of
U.S. firms,” Journal of International Economics, 33, pp. 57-76
Moshirian, F. (2001), `International investment in financial services', Journal of Banking and
Finance, No. 25, pp. 317-337
Papi, L. and Revoltella, D. (1999), `Foreign Direct Investment in the Banking Sector: A
Transitional Economy Perspective', Development Studies Working Paper, No. 133
(November), Centro Studi Luca D'Agliano
United Nations: Measures of the Transnationalisation of Economic Activity, New York and
Geneva, United Nations Conference on Trade and Development, 2000b.
Wilkins, M (1970) The Emergence of Multinational Enterprise: American Business Abroad
from the Colonial Era to 1914, Cambridge, MA, Harvard University Press, 1970.
9 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 Appendix 1
List of Banks in Ghana (Register of licensed Banks as at June 2009)
Central Bank
Bank of Ghana
Universal and Offshore Banks
Barclays Bank of Ghana Limited
Universal Banks
Access Bank (Ghana) Limited
Agricultural Development Bank
Amalgamated Bank Limited
Bank of Baroda
Banque Sahelo-Saharienne Pour L'investissement Et Le Commerce
Cal Bank Limited
Ecobank Ghana Limited
Fidelity Bank Limited
First Atlantic merchant Bank Limited
Ghana Commercial Bank Limited
Guaranty Trust Bank (Ghana) Limited
HFC Bank (Ghana) Limited
Intercontinental Bank (Ghana) Limited
International Commercial Bank Limited
Merchant Bank (Ghana) Limited
National Investment Bank Limited
Prudential Bank Limited
SG-SSB Limited
Stanbic Bank Ghana Limited
Standard Chartered Bank Ghana Limited
The Trust Bank Limited
Unibank Ghana Limited
UT Bank Limited
Zenith Bank (GH) Limited
Other Banks
ARB Apex Bank Limited
Source: www.bog.gov.gh
Accessed 05.09 PM 18/01/2010
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