Financial Liberalization and Foreign Bank Entry in MENA

This paper analyzes the impacts of financial liberalization and foreign bank entry on competitiveness and soundness of domestic banking system as well as credit growth in association with financial sector development, focusing on MENA region’s comparative benchmarking performances with those of middle -income countries. We find that financial sector development is positively related to foreign bank presence and financial depth has been driven mainly by expansion of domestic credit to private sector, rather than to public sector. The underlying factor of MENA’s slow opening-up domestic financial market may be due to the dominance of state-owned banks and the protection by a safeguard scheme of regulation on banking ownership in some countries. Thus, a prerequisite for encouraging foreign entry will be to privatize domestic banks first, based on establishment of stronger institutions. Econometric evidences for the MENA banking sector suggest that financial liberalization, accelerated by foreign bank entry and privatization of domestic state -owned banks, contributes to net profitability and better capitalization for domestic banks. In terms of scale economies as a good indicator of overall banking efficiency, our empirical results also confirm that a more efficient financial market underpinned by well-balanced development of financial sectors induces a higher banking efficiency. 1 This was prepared as a background paper for the MENA Trade Intensification Study. The author is grateful to Aristomene Varoudakis, Claessens Stijn, ... for helpful suggestions and comments. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author and do not necessarily reflect the view of the World Bank, its Executive, or the countries they represent.