The Impact of Foreign Banks Penetration on Credit Allocation and Lending Rates : Evidence from ASEAN Countries

Following the wave of deregulation around the world, several countries experienced the
increase in foreign bank operations in their domestic banking industries. Several scholars have
attempted to examine the impact of foreign bank penetration on some aspects, mostly related
to efficiency measures. Limited studies discuss other dimensions, such as the impact on risk
and market performances. Using six ASEAN countries (Indonesia, Malaysia, the Philippines,
Singapore, Thailand, and Vietnam) as the objects, this study tries to fill in the gap by assessing
the impact of foreign banks penetration in two important variables: the proportion of loans in
different types of borrowers (Small-sized and Medium EnterprisesSMEs; large corporations;
and loan in foreign currencies) and lending rates. We grouped foreign banks according to their
mode of entry: greenfield and takeover of previously domestic-owned banks. The results of
this study reveal that foreign bank entry in the form of greenfield tend to devote smaller
proportion of their lending to SMEs than foreign banks that have acquired existing domestic
banks. This result implies that greenfield banks have comparative disadvantages in lending to
more opaque borrowers, since they favor to lend to "credit-worthy" or less risky customers
like large corporations. From lending rates perspective, this study shows that foreign banks
entry does not have a significant impact on lending rates; however, it indicates that foreign
banks tend to charge lower lending rates than those of domestic banks. The implication of our
findings suggest that without any specific policy from regulators to fulfill the needs of small
businesses, foreign banks will always tend to benefit only large corporations.
Keywords: Bank, foreign ownership, lending portfolio, lending rate, small business