Publication: Does Foreign Bank Penetration Reduce Access to Credit in Developing Countries? Evidence from Asking Borrowers
Loading...
Published
2001-11
ISSN
Date
2014-08-19
Editor(s)
Abstract
Existing evidence on the effect of foreign bank penetration on lending to small and medium-size enterprises is ambiguous. Case studies of developing countries show that foreign banks lend less to such firms than domestic banks do. But cross-country studies find that foreign bank entry fosters competition and reduces interest rates, benefits that should extend to all firms. The authors use data from a large cross-country survey of enterprises to investigate this issue. Their results suggest that foreign bank penetration improves financing conditions (both the quantities of financing and the terms) for enterprises of all sizes, although it seems to benefit larger firms more.
Link to Data Set
Citation
“Clarke, George R.G.; Cull, Robert; Martinez Peria, Maria Soledad. 2001. Does Foreign Bank Penetration Reduce Access to Credit in Developing Countries? Evidence from Asking Borrowers. Policy Research Working Paper;No. 2716. © http://hdl.handle.net/10986/19437 License: CC BY 3.0 IGO.”
Digital Object Identifier
Associated URLs
Associated content
Other publications in this report series
Publication Climate and Social Sustainability in Fragility, Conflict, and Violence Contexts(Washington, DC: World Bank, 2026-01-07)Climate change is widely recognized as a driver of violent conflict, but its broader social effects remain less understood. Ignoring these dimensions risks a vicious cycle where climate policies might undermine socially just adaptation. Evidence is still limited on how climate shocks influence political participation, trust, or migration. This paper helps fill that gap by examining links between climate change, conflict, and social sustainability, with a focus on inclusion, resilience, cohesion, and legitimacy. Using secondary data from 2019–24, the study applies simple correlation-based methods to test three hypotheses on the nature, severity, and composition of these associations. The analysis combines multiple climate impact measures, new conflict classifications, recent social sustainability frameworks, and controls for population and geography. The results reveal strong correlations—not causation—between climate events and contexts of fragility, conflict, and violence. Climate impacts are most pronounced in both national and subnational conflict settings. The study also finds robust links between fragility, conflict, and violence and low levels of social sustainability, reflecting its role as both a driver and consequence of conflict. Some dimensions—such as violent events and insecurity—appear weaker in areas most affected by climate shocks. Two of the hypotheses are supported, and one remains inconclusive.Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication Institutional Capacity for Policy Implementation: An Analytical Framework(Washington, DC: World Bank, 2026-01-07)State capacity is an important prerequisite for policy implementation, yet at the country level it is difficult to measure, assess, and reform. This paper proposes a focus on institutional capacity: the ability of public institutions to implement the specific policy mandates for which they are responsible. Based on a review of existing literature, the paper defines the different dimensions that compose institutional capacity and groups them into two cross-cutting categories: organizational dimensions (personnel, financial resources, information systems, and management practices) and governance dimensions (transparency, independence, and accountability). The paper proposes measures for organizational and governance dimensions using existing data, shows intra-institutional variation of these measures within countries, and discusses how new data could be collected for better measurement of these concepts. Finally, the paper illustrates how the framework can be used to diagnose the sources of common problems related to weak policy implementation.Publication South Africa’s Fragmented Cities: The Unequal Burden of Labor Market Frictions(Washington, DC: World Bank, 2026-01-08)Using high-resolution administrative, census, and satellite data, this paper shows that South African cities are characterized by spatial mismatches between where people live and where jobs are located, relative to 20 global peers. Areas within 5 kilometers of commercial centers have 9,300 fewer residents per square kilometer than expected, which is 60 percent below the global median. Poor, dense neighborhoods are most affected. In Johannesburg, a 10-percentile increase in distance from the nearest business hub corresponds to a 3.7-percentile drop in asset wealth (a proxy of household wellbeing) and 4.9-percentile drop in employment. In Cape Town, the declines are 4.0 and 3.7 percentiles, respectively. Employment is 87 percent lower in the poorest decile than the richest in Johannesburg and 61 percent lower in Cape Town. These findings suggest that South Africa’s spatial organization of people and economic activity constrains agglomeration and reinforces inequality. This methodology provides a scalable and standardized data-driven framework to analyze spatial accessibility and agglomeration frictions in complex, data-constrained urban systems.Publication Investment in Emerging and Developing Economies(Washington, DC: World Bank, 2026-01-07)The world faces a pressing challenge to meet key development objectives amid slowing growth and rising macroeconomic and geopolitical risks. With the number of job seekers rising rapidly, infrastructure shortfalls continuing to be large, and climate costs mounting, the case for a significant investment push has never been stronger. Yet the capacity to respond in many emerging markets and developing economies has eroded. Since the global financial crisis, investment growth has slowed to about half its pace in the 2000s, with both public and private investment weakening. Foreign direct investment inflows—a critical source of capital, technology, and managerial know-how—have also fallen sharply and become increasingly concentrated, leaving low-income countries with only a marginal share. The risks of further retrenchment are significant, as trade tensions, policy uncertainty, and elevated debt levels continue to weigh on investment. Reigniting momentum will require ambitious domestic reforms to strengthen institutions, rebuild macro-fiscal stability, and deepen trade and investment integration—the foundations of a supportive business climate. At the same time, international cooperation is indispensable. A renewed commitment to a predictable system of cross-border trade and investment flows, combined with scaled-up financial support and sustained technical assistance, is essential to help emerging markets and developing economies—especially low-income countries and economies in fragile and conflict situations—bridge financing gaps and implement the domestic reforms needed to restore investment as an engine of growth, jobs, and development.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Foreign Bank Participation in Developing Countries : What Do We Know about the Drivers and Consequences of This Phenomenon?(2010-08-01)Foreign bank participation has increased steadily across developing countries since the mid-1990s. This paper documents this trend and surveys the existing literature to explore the drivers and consequences of this phenomenon, paying particular attention to the differences observed across regions both in the degree of foreign bank participation and in the impact of this process. Local profit opportunities, the absence of barriers to entry, and the presence of mechanisms to mitigate information problems have been the main factors driving foreign bank entry across developing countries. In general, foreign bank participation has been shown to exert a positive influence on banking sector efficiency and competition. The weight of the evidence suggests that foreign bank presence does not endanger, but rather enhances banking sector stability. And although some case studies suggest that foreign bank entry limits access to finance, many cross-country studies offer evidence to the contrary.Publication Foreign Bank Acquisitions and Outreach : Evidence from Mexico(World Bank, Washington, DC, 2008-01)Recently, developing countries have witnessed a sharp increase in foreign bank participation. The authors examine the impact on banking outreach using newly gathered data for Mexico, where foreign bank participation rose from 2 percent to 83 percent of assets during 1997-2005. Country-, bank-, and bank-municipality level estimations show a decline in the number of deposit and loan accounts. While country- and bank-level estimations indicate an increase in the share of municipalities with bank branches and in the likelihood of bank presence, bank-municipality regressions show that only rich and urban municipalities benefited. Overall, the evidence is consistent with a decline in outreach.Publication Banking Sector Competition in Russia(2010-10-01)The Russian banking sector includes approximately 1,000 banks, but is it competitive? This paper analyzes bank competition in Russia during 2002-2008. The authors examine indicators of concentration and contestability, and compute non-structural measures of competition. They compare competition in Russia to that in Brazil, China, and India, and contrast competition across different groups of banks within Russia. Contestability in Russia is obstructed by uneven supervisory practices and an unclear exit process. Non-structural measures reveal that banks in Russia are less competitive than those in Brazil. Within Russia, large banks and state-owned banks exert more market power than the smaller and privately-owned institutions. Finally, business-oriented banks are more competitive than those concentrating on lending to individuals.Publication Bank Involvement with SMEs : Beyond Relationship Lending(World Bank, Washington, DC, 2008-06)The "conventional wisdom" in academic and policy circles argues that, while large and foreign banks are generally not interested in serving SMEs, small and niche banks have an advantage in doing so because they can overcome SME opaqueness through relationship lending. This paper shows that there is a gap between this view and what banks actually do. Banks perceive SMEs as a core and strategic business and seem well positioned to expand their links with SMEs. The recent intensification of bank involvement with SMEs in various emerging markets documented in this paper is neither led by small or niche banks nor highly dependent on relationship lending. Rather, all types of banks are catering to SMEs and larger, multiple-service banks have in fact a comparative advantage in offering a wide range of products and services on a large scale, through the use of new technologies, business models, and risk management systems.Publication Bank Financing for SMEs around the World : Drivers, Obstacles, Business Models, and Lending Practices(Washington, DC: World Bank, 2008-11)Using data from a survey of 91 banks in 45 countries, the authors characterize bank financing to small and medium enterprises (SMEs) around the world. They find that banks perceive the SME segment to be highly profitable, but perceive macroeconomic instability in developing countries and competition in developed countries as the main obstacles. To serve SMEs banks have set up dedicated departments and decentralized the sale of products to the branches. However, loan approval, risk management, and loan recovery functions remain centralized. Compared with large firms, banks are less exposed to small enterprises, charge them higher interest rates and fees, and experience more non-performing loans from lending to them. Although there are some differences in SMEs financing across government, private, and foreign-owned banks - with the latter being more likely to engage in arms-length lending - the most significant differences are found between banks in developed and developing countries. Banks in developing countries tend to be less exposed to SMEs, provide a lower share of investment loans, and charge higher fees and interest rates. Overall, the evidence suggests that the lending environment is more important than firm size or bank ownership type in shaping bank financing to SMEs.
Users also downloaded
Showing related downloaded files
Publication The Effect of a Land Titling Programme on Households’ Access to Credit(Taylor and Francis, 2015-06)This paper assesses the effects of property titling on households’ access to and use of credit by focusing on household responses to an exogenous change in their formal ownership status. We isolate the credit effect on legal ownership by comparing households from communities in Osasco, Brazil. Our statistical estimates suggest that land titling increases credit use, decreases reliance on credit borrowed from relatives, and increases credit borrowed from commercial banks. We also find that treated households increased their consumption of time-saving durable goods, which explains an observed reallocation of time among household members, with adults working more and children less.Publication The Effectiveness of Promotion Agencies at Attracting Foreign Direct Investment(Washington, DC: World Bank, 2004)A perplexing question has become increasingly important: Does investment promotion really work? The authors hereby made a major step in providing a convincing answer to this question. Because many countries were not yet trying to promote investment, the authors could conduct a very simple test: compare foreign direct investment (FDI) flows into countries that had promotion activities in the United States, with the flows into countries that didn't. The study provided some crude support for the idea that promotion worked and, with some assumptions, the costs of attracting an investor, or its trade-off seemed to favor promotion. But more recent data from this survey provided the authors a more sophisticated methodology; as a result, their study is more convincing, and addresses many more questions than earlier work. They find the median expenditure on investment by developing countries to be smaller than expected. However, the study shows that expenditures below a certain annual level yield few, if any returns. Where the investment climate is bad, efforts to improve policy seem sensible; but in fact, in countries with very poor investment climates, returns to expenditures on other promotion activities are likely to be especially low. Similarly, it is likely that promotion has more impact on certain kinds of investors than on others. The research stipulates important factors about organizational issues, and, results show that agencies with some kind of participation from the private sector, do better than those that are purely governmental. It also provides evidence to suggest that, at least for many countries, a dollar spent on investment promotion yields a better return than a dollar provided as a subsidy or given up through a tax incentive program.Publication Digital Africa(Washington, DC: World Bank, 2023-03-13)All African countries need better and more jobs for their growing populations. "Digital Africa: Technological Transformation for Jobs" shows that broader use of productivity-enhancing, digital technologies by enterprises and households is imperative to generate such jobs, including for lower-skilled people. At the same time, it can support not only countries’ short-term objective of postpandemic economic recovery but also their vision of economic transformation with more inclusive growth. These outcomes are not automatic, however. Mobile internet availability has increased throughout the continent in recent years, but Africa’s uptake gap is the highest in the world. Areas with at least 3G mobile internet service now cover 84 percent of Africa’s population, but only 22 percent uses such services. And the average African business lags in the use of smartphones and computers as well as more sophisticated digital technologies that catalyze further productivity gains. Two issues explain the usage gap: affordability of these new technologies and willingness to use them. For the 40 percent of Africans below the extreme poverty line, mobile data plans alone would cost one-third of their incomes—in addition to the price of access devices, apps, and electricity. Data plans for small- and medium-size businesses are also more expensive than in other regions. Moreover, shortcomings in the quality of internet services—and in the supply of attractive, skills-appropriate apps that promote entrepreneurship and raise earnings—dampen people’s willingness to use them. For those countries already using these technologies, the development payoffs are significant. New empirical studies for this report add to the rapidly growing evidence that mobile internet availability directly raises enterprise productivity, increases jobs, and reduces poverty throughout Africa. To realize these and other benefits more widely, Africa’s countries must implement complementary and mutually reinforcing policies to strengthen both consumers’ ability to pay and willingness to use digital technologies. These interventions must prioritize productive use to generate large numbers of inclusive jobs in a region poised to benefit from a massive, youthful workforce—one projected to become the world’s largest by the end of this century.Publication Learning by Exporting or Self-Selection into Exporting?(Taylor and Francis, 2020-06-18)This paper explores the export-productivity relationship using firm-level data from Egypt over the 2003–2008 period. Previous studies using data from developed countries suggest that self-selection is the main driver of the exporter premium. Using a propensity-score matching difference-in-difference approach, we find that both labor productivity and total factor productivity are significantly higher for exporters than for non-exporters. On average, labor productivity and total factor productivity are, respectively, 43% and 61% higher for exporting firms than for domestically-oriented firms. Accounting for the level of development of destination countries, we find that this export premium is due to a learning-by-exporting process rather than just a self-selection of more productive firms into exporting. In contrast to exporters to OECD countries, exporters to Non-OECD countries self-select into export markets, signaling the importance of the technical assistance from OECD buyers.Publication Nuclear Power and Sustainable Energy Policy : Promises and Perils(World Bank, 2010-08-02)The author examines the challenges and opportunities of nuclear power in meeting the projected large absolute increase in energy demand, especially electricity, throughout the industrialized and developing world, while helping to mitigate the threat of climate change. A significant global nuclear power deployment would engender serious risks related to proliferation, safety, and waste disposal. Unlike renewable sources of energy, nuclear power is an unforgiving technology because human lapses and errors can have ecological and social impacts that are catastrophic and irreversible. However, according to some analysts, advances in the design of nuclear reactors may have reduced their associated risks and improved their performance. Moreover, while a variety of renewable energy sources (hydro, wind, modern biomass, solar) will play important roles in the transition to a low-carbon economy, some analysts perceive that nuclear power is the only proven technology for generating electricity that is both largely carbon-free, not location specific (as with wind, hydro and solar), and amenable to significant scaling up. Thus given the projections of threats from climate change, and if the considerable strain experienced by world energy markets in recent years is a harbinger of things to come, then there is a rationale for examining the pros and cons of nuclear power as a supply option within low-carbon strategies. It should be noted that despite the emerging centrality of climate change and security of supply in the energy policy debate, nuclear power is still viewed with a great deal of skepticism and in fact continues to elicit considerable opposition. Indeed the views on nuclear power in the context of sustainable energy policy are highly divergent. A thorough evaluation of all aspects of the issue is warranted.