Evidence Of Financial Disintermediation In Low Income Countries Are The Foreign Banks Responsible

The effects of foreign bank presence in a country and its impact on the domestic banking sector are contested topics. This paper adds a new dimension to the debate. In this paper, we investigate foreign banks' role in the decline of bank credit in low income countries. For the purpose of this paper, we define the decline in bank credit as financial disintermediation. Using cross sectional data from 36 low income and 54 middle income countries, we show that the increase in foreign bank claims is strongly and negatively correlated to the level of lending by the banks in the low income countries. Our analysis also refutes the claims that foreign banks are more efficient and cost effective than their domestic counterparts. In addition, we find evidence that, in low income countries, foreign bank claims is positively correlated to interest rate spread, real lending rate and exchange rate volatility. Finally, we also show that foreign bank claims are negatively associated with growth rates in the host countries, the low and middle income countries alike. We believe that our findings have important policy implications for the financial authorities of the developing countries.