Foreign Direct Investment and Bank Performance in South Africa

It is important for countries to constantly look for ways to attract foreign investments, as this helps develop capital structures within the country, supporting economic growth. This study sought to investigate whether foreign direct investment (FDI) affects the banking sector’s financial performance in South Africa. It also set out to understand if the COVID-19 pandemic significantly influenced the effect that FDI had on the financial performance of the banking sector. A quantitative method was used to measure and quantify the research variables, using secondary data for statistical analysis. Five South African banks were included from 2007 to 2021. The dependent variable was return on equity (ROE), representing the bank performance of the South African listed commercial banks. Represented by FDI, the independent variables were foreign equity capital, foreign intracompany loans, foreign reinvested earnings, and bank size for control. A dummy variable was also used to test whether the COVID-19 pandemic had influenced the effect of FDI on banks’ financial performance. A panel regression analysis was employed to explore the relationship between FDI and the financial performance of banks in South Africa. This study concludes that FDI influences bank performance in South Africa, with foreign equity capital and foreign reinvested earnings being significant, negative, and positive, respectively. It was also found that bank performance suffered during the COVID-19 pandemic. The conflicting results of the three FDI components indicate that policymakers should prioritise the importance of foreign direct investments by fostering an environment conducive to foreign investments that can support bank profitability.