The Impact of Foreign Bank Entry on the Efficiency and Sustainability of Domestic Banks in Developing Countries: A Meta-Frontier Approach

Fathi Mohamed Bouzidi and Aida Arbi Nefzi ()
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Fathi Mohamed Bouzidi: Department of Finance and Investment, Faculty of Business Administration, University of Tabuk, Tabuk 71491, Saudi Arabia
Aida Arbi Nefzi: Department of Finance and Investment, Faculty of Business Administration, University of Tabuk, Tabuk 71491, Saudi Arabia

Sustainability, 2024, vol. 16, issue 24, 1-23

Abstract: This study, which investigates the impact of foreign bank entry on the efficiency and sustainability of domestic banks in developing countries using a meta-frontier analysis to estimate efficiency scores, presents findings of significant importance to banking and finance. By incorporating financial, social, and environmental sustainability proxies—such as efficiency, loan portfolio composition, and macroeconomic conditions—this study assesses whether foreign competition enhances or undermines the long-term stability of domestic banking sectors. The results show that while foreign banks can improve financial efficiency, they may destabilize domestic banks, notably smaller or less capitalized institutions. Additionally, the findings suggest that banks with higher investments in SME lending and green projects demonstrate better social and environmental sustainability. Policymakers and financial institutions must consider these dual effects when promoting foreign bank entry.

Keywords: foreign banks; bank efficiency; sustainability; financial sustainability; social sustainability; environmental sustainability; meta-frontier analysis; developing countries; green lending; SME lending; macroeconomic factors; banking competition (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2024
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