The banking sector is the one traditionally carrying many risks for all parties engaged in its operations. Thus, companies in this industry must maintain a good public image that will assure potential customers of safety. It may seem logical that in countries with high corruption levels people will choose foreign banks over the local ones since the former has a proven international reputation. Nevertheless, small domestic institutions often appear to have more advantages in developing regions. At the same time, large foreign players try to modify their existing business models to suit the local culture.
Advantages of Local Banks
Despite the possibility of lacking a credit of trust from the population, small domestic banks have several advantages that allow them to compete against foreign companies. Firstly, they benefit from the relationships with customers that were created over the years (Vu, Do, & Skully, 2015). It is especially important in the loans sector, as potential borrowers suffer less from the asymmetric information. Studies suggest that it helps to reduce costs on monitoring, as well as decreases customers’ exposure to credit risk (Vu et al., 2015). As a result, people may expect to receive loans on better terms than those offered by foreign banks.
Secondly, a geographical position also plays an important role in collecting soft information. Banks that are closer to their customers are more likely to gather private information about their potential customers. This, in turn, allows financial organizations to impose fewer restrictions on non-price terms, as well as to give lower loan spreads (Vu et al., 2015). It takes more time for foreign banks to build the same relationships.
When entering a new market, large international banks often face the problem of regulations imposed on them by a government. Various rules restrict foreign companies from executing certain operations or significantly limit their extent. Nevertheless, the issue of low recognition for international banks is much greater. For instance, China is a challenging place for foreign players to operate due to the absence of relationships with customers, low informational support, and legal restrictions (Avkiran, Zhu, Tripe, & Walsh, 2017). In addition, the low level of transparency in this country prevents international banks from effectively competing with local organizations.
Foreign Banks and Development
Nowadays, as all types of business become global, companies try to adapt their strategies to local cultural norms. The banking sector is one of the most conservative in this respect, as it is bound by many restrictions and regulations. However, if a multinational corporation wishes to be competitive, it must consider various social norms in areas of functioning. International banks try to overcome the mentioned informational disadvantage by adapting to geographic and cultural differences (Azmeh, 2018). Future operations will be determined by how successfully a new market player will build relationships with customers.
There is a significant positive effect caused by the arrival of international banks to emerging countries. They help local institutions to develop their infrastructure and services. Firstly, studies suggest that the financial level in such a country increases (Azmeh, 2018). Secondly, areas that used to have poor technological infrastructure are forced to improve it to effectively compete. Besides, international banks may bring new financial products to countries, making local companies develop similar ones (Avkiran et al., 2017). As a result, all parties benefit from such variability on the market.
Conclusion
Despite the importance of reputation in the banking sphere, foreign players often have fewer advantages than their local competitors. Small domestic companies benefit from having long-term relationships with customers, which allows offering them better deals. At the same time, the arrival of international banks stimulates financial and infrastructural development in the area. Foreign banks also should adapt to the local culture for eliminating an informational disadvantage.
References
Avkiran, N. K., Zhu, Y., Tripe, D. W. L., & Walsh, K. (2017). Can foreign banks compete in China? Accounting and Finance, 57(4), 961-980. Web.
Azmeh, C. (2018). Foreign bank entry and financial development: New evidence of the cherry picking and foreign bank’s informational disadvantage phenomena in MENA countries. Cogent Economics and Finance, 6(1). Web.
Vu, T., Do, V., & Skully, M. (2015). Local versus foreign banks: A home market advantage in loan syndications. International Review of Financial Analysis, 37, 29-39. Web.