The impact of foreign bank entry on domestic banking in a developing country the Kenyan perspective

Using 19 banks level data from 2001 to 2009, the authors examine the penetration of foreign banks into Kenya and the impact on domestic banking operations. The authors find that the entry of foreign banks impacts the profitability of domestic banks negatively, but at the same time improves the efficiency of domestic banking including the reduction of
lending rates. The result also shows that the entry of foreign banks’ entry improves credit access to all firms. Although, policy makers may encourage entry of foreign banks, one concern is this group of banks engages in cream-skimming behavior in the sense they tend to lend mostly to big and international corporations. This research also shows that the
entry of foreign banks has a direct positive relationship with Tier 1 capital which enhances financial stability.