multilateral development agencies to make a difference. It is hopeful that this opportunity will not be lost, provided that investment climate and governance continue to improve, and capacity for regulation and supervision continue to enhance.

# **7. Conclusions**

The purpose of this paper is to investigate the relationship between the efficiency of domestic banks and foreign bank entry, and also to study possible role of the order of financial liberalization in this process. We focus on the banking sector of 30 countries for the period of 1995-2002. The BANKSCOPE database is our main data source.

The first issue that we investigate is how foreign bank openness differs from one country to another and whether foreign bank entry is related to the level of economic development. We also try to examine whether changes in the foreign bank share are significant determinant of domestic banks’ performance indicators such as the net interest margin, non-interest income, profits, overhead costs, and loan loss reserves. Finally, we check how these results change when countries are grouped according to the sequence of their financial liberalization. Throughout our analyses, we control for other bank variables and macroeconomic indicators.

The descriptive statistics indicate that there is no specific relationship between the level of economic development and openness to foreign banks. When the foreign bank share is investigated at the country level, it can be seen that this share changes a lot among countries. When countries are grouped according to their sequence of financial liberalization such as domestic financial markets first, stock market first, or capital account first, it is observed that domestic banks’ net interest margin, non-interest income, overhead costs, and loan loss reserve get the lowest values in the countries liberalized their stock market first. This indicates that competition is well-established in these countries. The highest values of non-interest income, overhead costs, and loan loss reserves are in the Asian and Latin American countries which liberalized their domestic financial markets first. Despite differences in the performance indicators among the groups, the foreign bank share does not change a lot. But it is considerably higher in the Asian and Latin American countries which liberalized either their stock market first or their capital accounts first.

The second set of results is based on regression analyses. They indicate that changes in the foreign bank share are not statistically significant in determining domestic banks’ performance indicators when all countries are pooled together. Then, the countries are grouped according to their order of financial liberalization and the same set of regressions is run for each group. Our results indicate that efficiency gains from foreign bank entry, in terms of lower profit and costs, are the highest in the countries which liberalized their stock market first. The weakest relationship between the performance indicators and the foreign bank share is obtained for the countries which liberalized their capital account first.

We are planning to extend this study in a way to link poverty to the performance of banks. The increased competition in the banking sector may have different effects on poverty. Firstly, the efficient development of the domestic banking sector is a key to the better economic growth performance which, in turn, determines the level of poverty. The second possibility is that rising competition among banks may hurt the poor especially in the short run. For example, credit rationing may increase along with competition. In this case, the poor, especially the ones living in rural areas, may not have an access to credit.

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