Foreign Bank Entry Restriction Effect on Bank Efficiency and Stability: A Comparative Study of Ethiopia and Sub-Saharan African Countries

Abstract

This study measures the foreign banks’ entry restriction effect on bank efficiency and stability in commercial banks from sub-Saharan African (SSA) countries and compared Ethiopia with other SSA countries based on their foreign banks’ entry restrictiveness. Bank financial stability was measured by z-score and bank efficiency proxies using the cost-to-income ratio (CIR). Country-based banking aggregate z–score and CIR were used to measure banking sector financial stability and efficiency, respectively. Some selected SSA countries are used as a sample over the period 2000-2021 and a panel data regression techniques random effect IV model and Hausman and Taylor model are used for measuring bank efficiency and stability, respectively. The empirical findings show a significant negative relationship between restricted financial regulation and bank efficiency, while restricted financial regulation has a significant positive effect on bank stability. Finally, the result inclined toward the theory of liberalization. Through liberalizing foreign bank entry, banks can boost the efficiency of the banking sector.