THE IMPACT OF FOREIGN BANK ENTRY ON DOMESTIC BANKS AND ECONOMY OF LAO PDR
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Abstract
This study aims to estimate the effects of foreign bank presence on the performance of domestic banks and the economy in the Lao PDR empirically. The analysis of the effect on domestic bank performance, employing a panel data methodology by random effect model. The results specifically show that higher foreign bank entry causes the management ability of domestic banks to drop as the operating expenses and total cost of domestic banks have increased while the asset quality, liquidity, and bank growth also declined as the diminution of market share by loan. These all can point to the reduction of earning ability as well as the profitability of domestic banks. Furthermore, the second model is to detect the relationship between foreign bank presence and Lao Economy using the VAR Granger causality model and impulse response function. The result implies that changes in the growth rate of domestic GDP and credit to economy in Lao PDR cause foreign bank asset percentage change and mostly foreign banks perform as substitution not for complementary this makes the competition stronger which causes to lower domestic bank’s performance and can contribute to the lower growth rate of GDP in long run.
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