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Foreign Banks and Financial Inclusion in Emerging and Developing Economies: An Empirical Investigation: Foreign Banks and Financial Inclusion

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Abstract

An important dimension of the effects of foreign bank presence on financial sector development relates to that of financial inclusion. Despite its significance, the empirical literature offers little evidence on the relationship between foreign banks and financial inclusion. We examine this relationship by focusing on impact of foreign banks on both the accessibility and usage dimensions of financial inclusion for a panel of 50 emerging and developing economies over 2004–2009. Our findings show that foreign banks have a strong positive impact in furthering financial access while tending to impede the usage dimension, which is robust to alternative methodologies and definitions. Copyright © 2018 John Wiley & Sons, Ltd.

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... Financial inclusion has become a global agenda and a critical policy objective for economic development (World Bank Group, 2019). Financial inclusion is the availability and the use of banking products and services by all individuals at a reasonable price (Sarma and Pais, 2011;Gopalan and Rajan, 2018). Financial inclusion enables economic prosperity and reduces poverty (Bruhn and Love, 2014;Sehrawat and Giri, 2016;World Bank Group, 2019). ...
... Financial inclusion enables economic prosperity and reduces poverty (Bruhn and Love, 2014;Sehrawat and Giri, 2016;World Bank Group, 2019). It enables an economy to attain faster economic stability, increasing standards of living, decreasing levels of income inequality and strengthening to withstand economic shocks (Sarma and Pais, 2011;Gopalan and Rajan, 2018). ...
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... Financial inclusion/exclusion is increasingly becoming a subject of interest, examining the degree to which individuals have or lack equal access to opportunities offered by the financial sector. Gopalan and Rajan (2018) broadly define financial inclusion to "encompass the process of broadening the accessibility of financial services for households and firms". The growing interest has emerged from a better understanding of the important role of financial inclusion in achieving economic and social sustainable development by mobilising resources and channelling them for productive purposes in the form of loans. ...
... They are also perceived as being less susceptible to political pressures and less inclined to lend to connected parties. These factors imply a positive relationship between foreign bank presence and indicators of financial sector performance and greater outreach (Gopalan & Rajan, 2018). However, some studies find more ambiguous results, showing that foreign banks "cherry pick" borrowers (Detragiache, Gupta, & Tressel, 2008;and Beck & Martinez Peria, 2010). ...
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Studies on financial inclusion have focused on the determinants of access to finance but only a few s attempted to examine the impediments that women face trying to access finance. This paper contributes to this literature by understanding the underlying factors of gender gaps in accessing finance using the World Bank Global Findex database for 141 countries over time. We also construct a database combining bank-level data with other variables to examine the association between banking system ownership structure and concentration, the regulatory framework and other socio-economic variables reflecting women’s participation in the labour market and gender disparities in education, income and access to property across countries. Our results suggest that women are more likely to be excluded from the financial sector in countries where: (i) foreign-owned banks have smaller presence; (ii) state-owned banks have a bigger share in the banking system; and (iii) credit information is less available through public and private credit registries, and (iv) gaps between women and men in educational attainment are large. The results are robust to different specifications and alternative measures of financial inclusion.
... Further, in this study, we use a larger panel dataset featuring 85 EMDEs across all regions of the world for a time span running for over two decades between 1995 and 2017, thus enabling us to capture a heterogeneous sample of EMDEs with differing degrees of both financial inclusion and tourism demand. Thus, our data is not only more representative but also allows us to accurately estimate the relationship between financial inclusion and tourism demand amongst EMDEs where policymakers have prioritized financial inclusion (for more details, see Gopalan & Rajan 2018). ...
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The extant tourism literature has identified a range of economic, geographic, political, and social factors impacting tourism demand. However, existing research has ignored how financial inclusion influences tourism demand, especially in the context of emerging markets and developing economies (EMDEs). We make an empirical contribution in this paper by being the first to distinctly capture the impact of financial inclusion on tourism demand for 85 EMDEs across the world, spanning the time-period of 1995–2017. Using various measures of financial inclusion, we find robust evidence to support our conjecture that higher financial inclusion strongly augments higher tourism demand in an unambiguous manner. Our results also show that the impact of financial inclusivity is not non-linear, implying that financial inclusion in its entirety plays a crucial role in supporting countries to generate more tourism revenues regardless of their levels of financial inclusion, which has significant policy implications.
... Results of the sample split is given in columns 6&7. detailed discussion, see Gopalan & Rajan, 2018 and references cited within). However, considering that there is a distinction between banking concentration and banking competition, (Van Leuvensteijn, Bikker, van Rixtel, & Sørensen, 2011;Carbo-Valverde, Humphrey, Maudos, & Molyneux, 2009) we re-run our baseline model to capture the effects of both banking concentration and banking competition in terms of how foreign banks affect firms' access to credit. ...
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Several emerging market and developing economies (EMDEs) embracing financial liberalization have seen a growing presence of foreign banks in their countries over the last two decades. While foreign banks can contribute to reduced costs of financial intermediation which could result in increased credit availability, there is greater ambiguity about the relationship between foreign bank presence and firms’ access to credit. In this paper, we combine both disaggregate firm-level data from the World Bank Enterprise Survey (WBES) as well as country-data to construct a novel and comprehensive measure capturing firms’ credit constraints as well as information verifiability for firms. Using a firm-level sample of 37,578 observations representing 60 EMDEs covering the time period 2006 to 2014, we employ an ordered probit model on cross-sectional data to understand empirically how foreign banks affect firms’ access to credit. Our results show evidence for foreign bank presence tending to ease firms’ credit constraints. We also find that firms with audited financial statements tend to experience a reduction in credit constraints. Finally, our results point out that for micro, small and medium firms, in relation to the large firms, greater information availability through audited financial statements jointly associated with greater foreign bank presence tends to ease firm credit constraints.
... Therefore, there is heterogeneity among banking groups in the effect of usage of financial products on poverty conditions in India. Gopalan and Rajan (2018) examined the impact of foreign bank presence on financial inclusion for 50 developing countries, including India, between 2004 and 2009, and found that foreign banks have a substantial positive effect with respect to enhancing financial access, while they tend to hinder the usage of financial services. Therefore, the insignificant impact of financial inclusion through private sector banks on poverty reduction is likely to be affected by the presence of foreign banks in India, which are included in the group of private sector banks in our study. ...
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Thesis
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Studies of banking competition and competitive behavior both within and across countries typically utilise only one of the few measures that are available. In trying to assess the relative competitive position of banking markets in 14 European countries, existing indicators of competition are found to give conflicting predictions across countries, within countries, and over time. This is because indicators of competition tend to measure different things and are additionally influenced by cross-country differences in cost efficiency, fee income levels, real economic growth and inflation. We attempt to separate bank pricing power from these embodied influences and derive more consistent cross-country estimates of banking sector competition. The main result is that our measure of bank pricing power suggests that banking market competition in Europe may well be stronger than implied by traditional measures and analysis.
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We study how foreign bank penetration affects financial sector development in poor countries. A theoretical model shows that when foreign banks are better at monitoring highend customers than domestic banks, their entry benefits those customers but may hurt other customers and worsen welfare. The model also predicts that credit to the private sector should be lower in countries with more foreign bank penetration. In the empirical section, we show that, in poor countries, a stronger foreign bank presence is robustly associated with less credit to the private sector both in cross-sectional and panel tests. In addition, in countries with more foreign bank penetration, credit growth is slower and there is less access to credit. We find no adverse effects of foreign bank presence in more advanced countries.
Article
This presentation provides an overview of the subset of methods for panel data and the associated Stata xt commands most commonly used by microeconometricians. First, attention is focused on a short panel, meaning data on many individual units and few time periods. Examples include longitudinal surveys of many individuals and panel datasets on many firms. Then the data can be viewed as being clustered on the individual unit and panel methods used are also applicable to other forms of clustered data such as cross-section data from individual-level surveys conducted at many villages with clustering at the village level. Second, emphasis is placed on using the repeated measures aspect of panel data to estimate key marginal effects that can be interpreted as measuring causation rather than mere correlation. The leading methods assume time-invariant individual-specific effects (or “fixed effects”). Instrumental variables (IV) methods can also be used, with data from periods other than the current year potentially serving as instruments. Third, some analyses use dynamic models rather than static models. Particular interest lies in fitting models with both lagged dependent variables and fixed effects. The paper additionally surveys other panel methods used in econometrics, such as those for nonlinear models and those for dynamic panels with many periods of data.
Article
How far does mobility of multinational banks solve problems of financial development? Using a panel of 80,000 loans over 7 years, I show that greater cultural and geographical distance between a foreign bank's headquarters and local branches leads it to further avoid lending to "informationally difficult" yet fundamentally sound firms requiring relational contracting. Greater distance also makes them less likely to bilaterally renegotiate, and less successful at recovering defaults. Differences in bank size, legal institutions, risk preferences, or unobserved borrower heterogeneity cannot explain these results. These distance constraints can be large enough to permanently exclude certain sectors of the economy from financing by foreign banks. Copyright 2006 by The American Finance Association.
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