Why on Earth Should Foreign Banks Invest in Africa's Financial Services Sector? Evidence from Financial Multinationals in Ghana

Abstract

While sub-Saharan African countries have been able to attract some degree of resource-seeking foreign direct investment (FDI) due to their abundant natural resources, financial FDI inflows have proved to be elusive for the region, in spite of the widespread financial-sector adjustment programs that offer attractive incentive packages for financial multinational corporations (MNCs). Literature surrounding the determinants of FDI inflows has mainly focused on manufacturing and real production activity. We analyzed the root causes of the weak administrative and institutional framework in Africa's banking industry, using Ghana as a case in point. Focusing on two financial MNCs as case studies, this article validates the significance of a thorough qualitative investigation in evaluating the explanations as to why most foreign banks do not invest in sub-Saharan Africa and why the few that do have relatively insignificant operations. The study also reveals that despite the far-reaching reforms, there are several structural constraints and deficiencies placed on financial MNCs that affect the size of the business they can conduct and their future investment decisions. One of the major issues prior to the financial-sector reforms in Africa was disintegration, and the restructuring was not designed to create an attractive location for foreign capital; hence, the low financial FDI inflows to Ghana in particular and Africa in general.