Foreign Investment Effects on the Banking Sector in Georgia

Using data from 2004 – 2008, we investigate the effect of foreign ownership on banks efficiency and financial performance. The data is a balanced panel consisting of 16 banks and 640 observations. In random effect regression, to investigate the influence of foreign ownership type banks’, we use the efficiency measures ROA (return on asset) and ROE (return on equity). Appling stochastic frontier analysis, we estimate banks cost efficiency. The efficiency analysis reveals that banks with foreign strategic ownership or international financial institutions involvement (EBRD or IFC) are more cost efficient than their domestic counterparts. The study also found that foreign strategic ownership positively affects the return on equity but negatively affects the banks’ return on assets. Investigation of how efficiently foreign majority owned banks are using their inputs showed that banks with foreign majority ownership are significantly less cost efficient than those with foreign strategic ownership. We find that foreign majority ownership has ambiguous effects on financial performance — it increases the return on assets but decreases the return on equity. This research highlights the importance for bank performance of a large strategic shareholder who takes a controlling interest in the bank.