Effect of home-host regulatory differences on the efficiency of foreign banks in Kenya

Abstract

This study examines the effect of home country and host country regulations on the efficiency of foreign banks in Kenya; using bank level data based on a sample of two foreign banks and three local banks of the top tier category; and country-level data based on two countries: Kenya and the United Kingdom. It applies a two stage Data Envelopment Analysis (DEA) methodology where efficiency scores are detennined using DEA in the first stage then a Tobit regression is applied to establish the regulatory variables that have an influence on bank efficiency in the second stage. The study establishes that over the study period, foreign banks in Kenya have on average exhibited higher levels of efficiency as compared to local banks. The regulatory variables identified to have statistically significant effects on bank efficiency are overall activity restrictions, capital requirements, official supervisory power and private monitoring. The study differs from current studies that only compare local banks and foreign banks efficiencies in local jurisdictions by establishing whether regulatory variables influence the observed efficiency scores.