How Foreign Ownership and Competition Affect the Credit Growth of Commercial Banks: Evidence from A Transitional Economy

Abstract

This study examines the relationship between foreign ownership and market competition, proxied by bank market power, affecting the credit growth of 32 commercial banks in Vietnam from 2010 to 2020. The Random Effects Model and the Dynamic System Generalized Method of Moments were used to analyze an unbalanced panel of 278 annual observations. The findings report that foreign ownership reduces credit growth, with each percentage increase in foreign ownership reducing credit growth by 0.74%. The results indicate an inverse U-shaped relationship between competitive advantage and credit growth, with a turning point of 0.46. The main findings were found to be robust after employing an alternative market power proxy. The study recommends that bank managers and policymakers limit foreign ownership and control commercial banks’ market power to promote sustainable credit growth.