Foreign Investment in Colombia’s Financial Sector

Author: Mr. Adolfo Barajas, Ms. Natalia Salazar, and Mr. Roberto Steiner

This study analyzes foreign investment in Colombia's financial system, chronicling major changes in legislation, describing how investment flows evolved over time, and comparing performance of foreign-owned versus domestic banks. Panel data estimations reveal that financial liberalization in general had a beneficial impact on bank behavior in Colombia. Although the positive contribution of foreign entry may be overstated in recent studies by not controlling for other liberalization factors, foreign (and domestic) entry beginning in 1990 did improve bank behavior by enhancing operative efficiency and competition. However, this came at the expense of a deterioration in the loan quality of domestic banks.

Volume/Issue: Volume 1999 Issue 150

Publication date: November 1999

ISBN: 9781451856941

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Business and Economics , Banks and Banking , Exports and Imports , WP , foreign bank , market share , domestic bank , ownership bank , bank behavior , Foreign investment , banking system , Colombia , financial liberalization , banks spread , maximization model , bank ownership , banks interest rate payment , Foreign banks , Commercial banks , Loans , Foreign direct investment , Nonperforming loans

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Summary

This study analyzes foreign investment in Colombia’s financial system, chronicling major changes in legislation, describing how investment flows evolved over time, and comparing performance of foreign–owned versus domestic banks. Panel data estimations reveal that financial liberalization in general had a beneficial impact on bank behavior in Colombia. Although the positive contribution of foreign entry may be overstated in recent studies by not controlling for other liberalization factors, foreign (and domestic) entry beginning in 1990 did improve bank behavior by enhancing operative efficiency and competition. However, this came at the expense of a deterioration in the loan quality of domestic banks.