Banking efficiency in emerging economies: Does foreign banks entry matter in the Ghanaian context?

Abstract

AbstractThis study empirically examines the effect of foreign banks entry on banking efficiency scores, using the truncated regression data envelopment analysis model for 25s banks in Ghana, over a 6‐year period (2010–2015). We decompose the efficiency scores into three (technical, cost, and allocative efficiency), and the results indicate that banks in Ghana are marginally inefficient in operating closer to their optimal capacity. The findings show that the input‐oriented model slacks are needed to push an inefficient bank closer to where an efficient bank is positioned. From the results, an immediate and a short‐term entry of foreign banks have a consistent negative relationship with both technical‐ and cost‐efficiency scores whereas long‐term entry of foreign banks shows an inconsistent relationship with the three banking efficiency scores. Thus, the drive towards a positive impact of foreign banks entry on the three efficiency scores is dependent on the form of banking efficiency considered and the interaction term between competitive banking environment (competition) and foreign banks' entry. The study suggests that policymakers and managers in emerging markets should improve on their bank efficiencies in both a competitive banking environment and during periods of foreign bank entry. Moreover, managers of banks should make adjustment to their input resources in order to cope with new banking technologies from foreign bank entry—thereby improving banking efficiencies.