THE IMPACT OF FOREIGN BANK ENTRY ON DOMESTIC BANKS AND ECONOMY OF LAO PDR

Abstract

As the level of financial combination and liberalization increased considerably in the 1990s, the number and market share of foreign banks in Lao PDR has increased rapidly. The purpose of this thesis is to estimate the effects of foreign bank presence on the performance of domestic banks and the economy in the Lao PDR empirically. For the first model, a sample of 27 banks over the time period of 2012–2020 is used in the analysis of the effect on the performance of domestic banks, employing a panel data methodology by random effect model. The results specifically show that higher foreign bank entry causes the management ability of domestic banks to drop as the operating expenses and total cost of domestic banks have increased, while the asset quality, liquidity, and bank growth also declined as the diminution of market share by loan. All of these can point to the reduction of earning ability as well as the profitability of domestic banks as ROE, ROA, and NPM. Furthermore, the second model is to detect the relationship between foreign bank presence and the Lao economy using the VAR Granger causality model and impulse response function, using time series data from 2005 to 2020. The result implies that changes in the growth rate of domestic GDP and credit to economy or financial development in Lao PDR cause foreign bank asset percentage changes and mostly foreign banks perform as substitutions, not for complementary, this makes the competition stronger which lower domestic bank’s performance and cause a lower growth rate of GDP in long run.

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