Abstract
This study investigates the link between industry reliance on external finance, real activity, and foreign bank entry to poverty reduction. Results show that foreign bank entry widens Africa's poverty gap, notably when financing to high value-added industry sectors remains low. Results are consistent with the cream-skimming intermediation hypothesis, occasioning a contraction of credit. By tendering credit to a broader set of firms in industries disproportionately reliant on external finance to grow, foreign banks may partially offset the welfare-reducing effect. However, foreign banks' role in driving down poverty rates is conditional to the host country's institutional quality – an institutional threshold beyond which foreign banks' entry may induce poverty-reducing effects, necessitating a minimum level enabling institutional environment in the host country.
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