Investigation of potential benefit and risks resulting from entry of foreign owned bank in Ethiopian banking sector

Abstract

Up to now, the Ethiopian banking sector has not been opened up completely for foreign banks. This refers mainly to the still existing restriction to set up branches in the Ethiopia that will even remain in force after the accession to the World Trade Organization. The restrictions due to them have the potential positive effects and risks on the banking sector. Foreign banks have a positive and negative impact on banking sector of Ethiopia. This research paper concerned with investigation of the potential positive effects and risks results from foreign banks entry in Ethiopian banking sector especially on domestic commercial banks. The main objective of this research is to assess the potential positive and negative effects of foreign banks entry on the banking sector of Ethiopia. From total domestic commercial banks 5 (Five) domestic commercial banks were selected through Non probability sampling technique that was judgmental sample based on their total assets and year of establishment. In addition, 100 employees were selected from these domestic commercial banks. From total respondents 97 respondents were considered and 3 respondent’s response were missed. For the purpose of this study primary data were collected using questionnaire and. The collected data was analyzed using Explanatory statistics and SPSS software. The result of this study shows that, foreign banks entry in to Ethiopian banking sector has its own positive and negative potential effects on Ethiopian banking sector. The potential negative effect of foreign bank entry on Ethiopian banking sector are Lack of domestic strong supervisor body, fear of foreign bank domination, lack of domestic commitment, and Capital Flight. And, the potential positive effects of foreign bank entry on Ethiopian Banking Sector are introducing new technology and financial innovation, possible economics of scale and scope, improvement of the competitive environment, development of financial market, improve the financial systems infrastructure and attracting foreign direct investments. In addition, the result shows why foreign banks open their representative and factors that attract foreign banks. The study concludes and recommends that domestic commercial banks in Ethiopia should develop their products or service cost and quality. And, update their technology to compute with foreign banks when entry is allowed. And also, they should develop their employee’s knowledge and skill. Finally, government should develop supervisory body efficiency to manage the sector efficiently when foreign banks join Ethiopian banking sector.