Acta Universitatis Danubius. Œconomica, Vol 10, No 2 (2014)

Abstract

This study examines the effect of foreign bank presence on the behaviour of domestic banks by using the annual data of 37 commercial banks comprising of 7 foreign and 30 domestic banks for the time period of 2007 to 2011, to investigate the effect of foreign bank presence  five banking ratios, net interest margin, return on assets, overhead, cost to income and nonperforming loans using panel regression analysis employing bank specific fixed effect model. As a developing country case, the results suggest that the increase in foreign bank share effects the interest margins and profitability of domestic banks in a decreasing manner. It wouldn't be erroneous to express that foreign banks have a positive effect on the competitive environment of domestic banks increasing overall banking standard in Pakistan, the licensing policies should be further liberalized to let new entrants further improve the domestic financial intermediation system.