The Impact of Foreign Banks on Economic Growth in Ghana

ABSTRACT

This study takes the finance-growth nexus further by looking at the direct and indirect impact of foreign banks on economic growth in Ghana. Using annual time series data from 1960 to 2013, the study examined the relationship between the share of foreign banks, bank competition and economic growth. The relationship between the share of foreign banks, bank competition and economic growth was established through the framework of endogenous growth model. In addition, the study employed the Johansen multivariate cointegration technique and vector error correction model to examine the long-run relationship and short-run dynamics among the variables. 

The results showed that, in the long run, the share of foreign banks is positively related to economic growth whilst bank competition is negatively related to economic growth. In the short run, the share of foreign banks and bank competition are not significantly associated with economic growth. The empirical results support the presence of direct impact of foreign banks on economic growth, but find no indirect impact of foreign banks on economic growth.

The study therefore, provides the backbone for policy makers who may be reluctant to remove restrictions on the entry of foreign banks to change their minds and introduce international competition to ensure effective mobilization and allocation of credit to productive sectors.