How Does Foreign Bank Entry Affect Financial Inclusion in Emerging and Developing Economies?

Abstract

An important dimension of the effects of foreign bank entry on financial sector development relates to that of financial inclusion. Despite its policy significance, the empirical literature offers little evidence on the impact of bank competition generally or foreign bank entry specifically on financial inclusion. This paper examines the relationship between foreign bank entry and financial inclusion for a panel of 57 emerging and developing economies over the period 2004-2009. The empirical findings suggest that foreign banks have a positive impact in furthering financial inclusion, though the relationship turns negative when foreign bank entry is followed by greater banking concentration.

Keywords: foreign bank entry, financial liberalization, financial inclusion, financial development, banking concentration

JEL Classification: F21, G00, G21, O16