Assessment of determinants of foreign banks investments in emerging economies: a survey of commercial banks in kenya

Abstract

Greater foreign participation in the banking industry raises a number of important analytical issues such as; the factors determining a bank’s decision to expand its activities abroad, its choice of countries to invest in, and the form of participation (branch, subsidiary, ownership of local banks), differences in the business focus of foreign and domestic banks; and the impact of foreign-entry on the performance of the domestic banking industry. This study therefore was set with an objective of assessing the factors that influence commercial banks investments in Kenya as an emerging economy. The study used descriptive survey as the research design on the population of 12 foreign commercial banks operating in Kenya. The data was collected by means of questionnaires consisting of both open and close ended questions. The data was analyzed using descriptive statistics. Qualitative data was analyzed using content analysis. The study identified profitability and credit expansion as the top most factors considered by foreign banks when investing in Kenya. International competition, technological innovation and advancement in foreign countries, favorable credit/cash ratio requirements, political stability in the foreign country, are the other factors that were viewed as critical in bank investment. However, tax consideration was viewed to have little though considerable influence in determining the foreign banks investment in Kenya. It was also established that foreign commercial banks have been operating in Kenya for a considerably long period. The oldest banks have been operating for over thirty years while the new entrants are less than five years old. Foreign banks in Kenya like domestic banks have enjoyed considerable branch networks mainly due to high profitability, relatively easy gain of market shares, and high level of skilled labour besides the relatively stable economy. Like most businesses, the foreign commercial banks face various risks that they need to handle in order to remain afloat on top being the exchange rate risk