Internationalisation and Firm Performance: Evidence From Estimates of Efficiency in Banking in Namibia and Tanzania

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Journal of International Development
J. Int. Dev. 20, 942–964 (2008)
Published online 9 July 2008 in Wiley InterScience
(www.interscience.wiley.com) DOI: 10.1002/jid.1455
INTERNATIONALISATION AND FIRM

PERFORMANCE: EVIDENCE FROM
ESTIMATES OF EFFICIENCY
IN BANKING IN NAMIBIA
AND TANZANIA
CHARLES C. OKEAHALAM*
BAR, AGH Group, Benmore, Johannesburg, South Africa
Abstract: This paper assesses and compares the impact of internationalisation on the economic
performance of firms in the banking sector in Namibia and Tanzania. With the aid of financial
ratios and econometric analysis, measures of efficiency are used as proxies for overall economic
performance and comparisons are made. In Namibia, the market is more concentrated than in
Tanzania, all the foreign banks are from one country, and they have had a presence in the country
for a long time. In Tanzania, the market is less concentrated than in Namibia, foreign entry is
from a number of countries and has been more recent. The study finds that in Namibia, all the
foreign banks are larger but more inefficient than domestically owned banks. In Tanzania, foreign
banks are more efficient than domestic banks. These results suggest that the generation of foreign
entry and industry structure are significant determinants of positive spillovers of international-
isation. They also indicate that the type of foreign entrant, not, just foreign entry determines the
impact on efficiency and the competitive landscape. Copyright # 2008 John Wiley & Sons, Ltd.
Keywords: internationalisation; performance; efficiency; competition; banking; Namibia;

Tanzania
JEL classification numbers: F21, F23, N27
1 INTRODUCTION
The aim of this paper is to assess and compare the impact of internationalisation on the
performance of banks in two sub-Saharan Africa (SSA) countries. A number of definitions
*Correspondence to: Charles C. Okeahalam, BAR, AGH Group, Private Bag X9, Postnet Suite 410, Benmore
2010, Johannesburg, South Africa. E-mail: co@groupagh.com
Copyright # 2008 John Wiley & Sons, Ltd.

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Internationalisation and Firm Performance 943
for internationalisation exist. However the definition which best fits the epistemology of
this study is provided by Dobson and Jacquet (1998 p. 3)–who define internationalisation
as a composite of factors that include ‘. . ... opening of domestic markets to cross-border
trade, allowing entry by foreign firms, and opening the capital account . . .’ The focus of
this paper is on the second part of that definition—foreign entry. Thus the term
internationalisation is used herein as the end state of the process of foreign direct
investment (FDI) and entry by foreign multinational firms.
As the literature review below will illustrate, the majority of studies on the impact of
internationalisation have used US and European data—and more recently some studies
have focused on data from Asia and South America. However there have been little or no
studies on SSA.1 The few studies which have been carried out on SSA tend to focus on the
impact of internationalisation on issues of terms of trade. A standard refrain of that
literature is that multinational and trans-national corporations are exploitative of African
markets and do not bring much benefit. Indeed, the facts are that foreign entry and
internationalisation in Africa are long standing and are tied to colonial relationships. And
to be sure, the first wave of internationalisation has allowed monopoly-type behaviour,
based on grand father rights to accrue. Yet the exact impact of more recent foreign entry is
less clear. This is quite an omission in the literature, and although important, banking in
SSA is understudied. Therefore this study makes a contribution to studies of banking in
SSA but also contributes to the literature by examining the impact of the different waves or
genres of internationalisation.
Financial ratios (accounting measures) and econometric analysis are used to assess and
compare the impact of internationalisation on the performance of the banking sector in
Namibia and Tanzania.2 Using efficiency as a proxy for performance we conclude that
entry by multinationals have not had a significantly positive impact on the competitive
landscape.
Since the usual (basic) method of assessing this is via pricing, a key question is whether a
focus on efficiency is capable of supporting such a conclusion. Our view is that it is. And as
Williams (1997) indicates, ‘. . .the choice of an appropriate paradigm to consider banks’
motivation to enter a new market and their subsequent performance is an important issue in
multinational banking’. So the choice of methodology therefore needs to be addressed.
Pricing is an obvious exogenous and direct competitive signal while measures of efficiency
are not. Indeed a large number of studies for example Berger and Hannan (1989) and
Okeahalam (1998) and (2004b) have focused on pricing in retail banking via analysis of
deposit spreads. Efficiency measures are intra-firm and usually require a more complex
analysis. However although less obvious, the economic information value contained in
measures of efficiency can be used effectively to deduce the nature of the competitive
environment.
The study is structured as follows: Section 2 provides a review of the findings on the
relationship between foreign entry, productivity and performance. Section 3 describes the
banking sector in Namibia and Tanzania, Section 4 provides a description of the data,
Section 5 provides estimates of a number of financial performance measures, Section 6
1
The literature search revealed just two econometric studies, which have only used data from Africa to address this
issue. Haddad and Harrison (1993) estimated spillovers in the Moroccan manufacturing sector and rejected the
hypothesis that foreign firms or a foreign presence increases productivity growth in domestic firms. The other
paper by Okeahalam (2004a) applied data envelope analysis to a panel data set on the banking sector of Botswana
and Uganda and found that branches of foreign banks are more efficient than domestic bank branches.
2
Barrios et al. (2002) carried out a similar comparison of Greece, Ireland and Spain.
Copyright # 2008 John Wiley & Sons, Ltd. J. Int. Dev. 20, 942–964 (2008)
DOI: 10.1002/jid
944 C. C. Okeahalam
provides estimates and results of efficiency measures and Section 7 provides conclusions
and highlights the key implications of the results on internationalisation.
2 PRODUCTIVITY AND INTERNATIONALISATION—A BRIEF

OVERVIEW OF THE LITERATURE
There has been extensive debate as to the extent to which domestic firms (and by
implication economies), benefit from FDI and entry, see Gorg and Strobl (2001) and
Herrero and Simon (2003) for recent reviews. The economics literature often describes
these benefits as spillovers. As Bosco, (2001) indicates, these spillovers can be in the form
of improved technology, financial returns, labour market productivity or some other
measure of productivity. The literature on spillovers provides insights of the impact of
internationalisation on the performance of firms–where performance is measured, as
herein, in terms of efficiency. On the whole, the findings are that there are mixed results
regarding the impact which FDI and internationalisation has on the performance of
domestic firms.
Allied to this, neoclassical theory, for example Meade (1968), implies that foreign
acquisitions are a form of natural selection in which inefficient firms are taken over. The
corollary of this is that firms with relatively lower levels of efficiency would change
ownership more frequently than other firms. However a large number of empirical studies
do not support this. For example, Ravenscraft and Scherer (1989) find that there is no
evidence that acquisitions improve efficiency.
On the other hand, the operating efficiency theory–see for example, McGuckin and
Nguyen (1995), argues that acquisitions and changes in ownership are determined by the
desire to ‘acquire’ efficiency rather than obtain efficiency through managerial discipline.
Thus in this theory, firms with relatively higher levels of efficiency change ownership more
frequently than other firms and this leads to an increase in overall efficiency. Linked to this
there has been very limited research on the preference of foreign firms when they buy
domestic firms. And there has been even less research on the impact which the industrial
structure in the domestic market of the foreign (acquiring) firm might have on the
efficiency levels after foreign entry has taken place.
This is important because a foreign firm from a competitive market is likely to do one of
two things. Firstly, dependent on its size (and the structure of the new market) it may
attempt to act like a monopoly and accrue rents which it could not accrue in its own
market–under such a scenario, the level of efficiency is likely to decrease. Or secondly,
dependent on the two factors just alluded to, it may attempt to compete. If it decides to do
so, then the overall level of efficiency should rise. Therefore entry by a foreign bank which
is inefficient or in the habit of operating in an oligopolistic environment is unlikely to result
in an improvement in the performance of firms in the domestic market. In such an instance,
as a general rule, aggregate market efficiency is likely to be downward sloping and the
benefits of internationalisation are likely to be small. The literature search suggests that
only a few studies have addressed this particular issue.
However several studies have examined the impact of FDI and internationalisation in the
manufacturing sector. The findings from these studies provide some insight as to the type of
methodology, which could be applied to studies on banking–so a brief review is provided
below. For, example Aitken and Harrison (1999) use panel data to examine whether
domestic firms benefit from direct foreign investment. They find that foreign equity
DOI: 10.1002/jid
participation is positively related to plant productivity. Along the same lines, Barrell and
Pain (1999) use an industry-level panel data set on the location of investments by US
multinationals in Europe. They find empirical evidence of significant spillovers from
inward investment on technical progress. The paper of Smarzynska (2002) uses firm-level
panel data on Lithuania and finds that foreign investment and ownership enhances positive
productivity spillovers.
In much the same way, Dimelis and Louri (2001) find a significant positive relationship
between foreign ownership and labour productivity. They also find that the level of positive
productivity spillovers is related to the degree of ownership. This is similar to the finding of
Gorg and Strobl (2002) who examine the effect of multinational companies on indigenous
firm development in the Irish manufacturing sector. And this also fits with the study and
approach of Markusen and Venables (1999) who find that multinationals may have a
positive affect on the development of indigenous firms by creating a linkage with
indigenous suppliers.
Allied to this Harris and Robinson (2003) use plant-level data on the manufacturing
sector in the United Kingdom for the 1974–1995 period and find that foreign-owned plants
are in general more productive. In a similar study Haskel et al. (2002) finds a significant
positive relationship between a foreign-affiliate’s share of activity in the domestic plant’s
industry and a domestic plant’s total factor productivity (TFP). Liu et al. (2000) also find
that the presence of FDI has a positive spillover effect on the productivity of UK-owned
firms.
So the literature on the impact of FDI on firm performance in the manufacturing sector is
fairly well developed. However as Herrero and Simon (2003) explain, although, we are
currently going through the third generation of internationalisation in the banking sector, in
general, the literature on FDI in banking is at a relatively embryonic stage. Furthermore
there have not been many studies which have attempted to explicitly assess the impact of
internationalisation on the performance of banks at the firm level–although some studies
have considered FDI and foreign entry in the banking sector. In the main, these studies
suggest that FDI and foreign entry in banking have positive spillovers and that
internationalisation improves firm performance and efficiency. A brief review of some of
the salient studies is provided below.
In their study of the impact of internationalisation in banking, Claessens et al. (1998)
find that in developing countries, foreign banks have higher profits than domestic banks and
that an increase in the number of foreign banks reduces the level of profitability and
margins of domestic banks. Also in one of the most comprehensive studies of its kind,
Micco et al. (2004) find that in developing countries, foreign ownership in banking is
significantly correlated with performance. This finding does not hold in developed
countries. Furthermore, they also suggest that state-owned banks in developing countries
are less profitable and have higher costs than private banks. Indeed Berger et al. (2005)
reach a similar conclusion after examining the effects of ownership on bank efficiency in
China. And the results of both studies is corroborated by a report published recently—
Bank for International Settlements (2004)—which finds that FDI in the financial sector has
encouraged financial liberalisation and reforms, and also finds that local banks’ exposure to
global competition increases efficiency through technology transfer, innovations,
competition and more efficient allocation of resources.
Another strand of the literature, for example, Crystal et al. (2001) and Galindo et al.
(2004) also supports this view and indicates that another benefit of entry by foreign banks is
that they have a positive impact on stability. This is supported by yet another study by staff
DOI: 10.1002/jid
946 C. C. Okeahalam
at the Bank for International Settlements–Moreno and Villar (2005). Further support of this
view is provided by To and Tripe (2002) who examine the performance of foreign-owned
banks in New Zealand and find that the length of time the foreign bank has been in New
Zealand and the size of the parent bank’s capital base are significant variables of the impact
of internationalisation- i.e. the longer a foreign entrant has been in the market—the less
likely positive benefits are to accrue.3 The literature also points to a range of other macro
benefits of internationalisation which, while important are of less relevance–given the
objectives of this study.4
However not all studies have found positive spillovers of internationalisation in banking.
Some studies find that foreign entry does not make markets more competitive or efficient.
For example Pehlivan and Kirkpatrick (1992) find that the entry of foreign banks in the
post–liberalisation period did not lead to an improvement in the efficiency of the domestic
banking sector in Turkey. This is supported by the study of Yeyati and Micco (2003) who
use a bank-level balance sheet database of eight Latin American countries,– and confirm
that this is the case in instances in which the market (of entry) is already concentrated. In
addition, Bonin et al. (2003) finds that while ownership is an important factor in
determining the efficiency of a bank, foreign banks do not appear to be significantly more
cost efficient.
So which view is correct? Clearly, a unifying theme of the literature is that the
relationship between FDI and economic performance is multivariate. In general, this is
because it is possible to attain positive spillovers on certain variables (such as technology or
labour) but not achieve aggregate positive spillovers. Furthermore as alluded to earlier on,
the industry structure in the country of the entrant will also determine whether or not there
will be positive benefits from internationalisation. A firm which is used to enjoying the
‘quiet life’ of monopoly is unlikely to want to face competition in a foreign market unless it
can use its’ scale there in more or less the same domineering way in which it operates in its’
domestic market of origin. Of course entry by such an inefficient firm may lead to mergers
and greater efficiency by incumbents–which could be considered a positive spillover–yet
on aggregate, the benefit of such a response will be a function of the arithmetic of the extent
of dominance by the entrant. Thus the productivity benefits of internationalisation may not
accrue if there are significant differences in the scale economies of the entrant and the
incumbents—particularly where the entrant is inefficient.
Policy makers might face a conundrum here—do they want the customers of banks
better served or do they want their banks to be competitive? Depending upon their answer
one could anticipate different evolutions of the banking markets. If the goal of policy is to
draw intellectual capital into the market place, the impact on efficiency becomes
interesting. The foreign entrant might be able to employ knowledge assets from
headquarters at a very low marginal cost and hence be very efficient, while the domestic
banks might actually have to develop specific knowledge assets and other resources which
may in the short-run drive up their costs. In this context, the specific skills of the foreign
bank as they are honed in their domestic market truly matters. Under such circumstances
the national identity and competitiveness of the different foreign banks is also important.
3
After a while foreign entrants take on habits of incumbents.
4
Some of these studies have demonstrated a strong positive relationship between financial intermediation and
economic growth. Strong empirical evidence now abounds to show that: an increase in the real deposit rate towards
its market determined level will lead to an increase in economic growth; a rise in real interest rates will encourage
saving and translate into an increase in the economic growth rate; growth rates in countries with negative real
interest rates generally fall below the rates in countries with positive rates of interest.
DOI: 10.1002/jid
The strategy of the foreign entrant may or not be the same as the domestic banks but is
clearly market specific. And indeed as we show herein, foreign banks in Namibia have
adopted a different strategy to those in Tanzania.
In some instances policy makers might allow entry by foreign banks into specific sectors
that are currently ill served by the existing domestic banks for a number of different
reasons. If the effect is to grow the overall banking market—e.g. capture clients who were
previously dealing with foreign banks in different market places—there may be no direct
competitive threat to the existing bank markets and little need for them to improve their
efficiency. On the other hand, it could be that the real driver in allowing the entry of foreign
banks is to improve the pricing of risk in the market place—in that case, foreign banks
might improve capital allocation in the country but not necessarily the efficiency of the
banks. Alternatively, developing country markets may seek to attract foreign banks in order
to link their markets to the home markets of the foreign entrant. This is something which
appears to be taking place in a number of SSA countries as a result of an increase in the rate
of FDI by South African firms.
In sum, the review of the literature indicates that there have been several studies on the
impact of internationalisation in the manufacturing sector, but much fewer studies on the
banking sector. In addition, in the studies of the banking sector, the quality of the data and
econometric methodology has been lower than that used in studies of other sectors—in
particular, manufacturing. Yet taken as a whole–the literature supports the case for
increased foreign entry and internationalisation in banking. But the relative paucity of the
banking sector internationalisation literature makes a meaningful case for further studies to
consider this issue.
In light of the above, we examine the impact of foreign ownership and
internationalisation on the level of efficiency of banks in two SSA countries. Central to
the approach taken is that the assessment of efficiency is a more true reflection of the
performance of firms and it is a concept, which lends itself to rigorous analysis for the
purpose of benchmarking and comparison. Thus the key questions which the study poses
are; firstly, how efficient are banks in Namibia and Tanzania?, secondly, are foreign banks
more efficient than domestic banks? and thirdly what does this tell us about the role of the
internationalisation and firm performance? To answer these questions; one 1st generation
country (Namibia) and one 2nd generation country (Tanzania) are selected in and attempt
to determine and compare the impact of internationalisation on the performance of banks in
two developing countries.5
Apart from this, as explained in more detail below, among other things, these two
countries have had quite different political, economic and social development. For
example, one country gained independence in the 1960s (as most African countries did),
while the other has been independent for less than 20 years. One country is sparsely
populated with less than 2 million inhabitants while the other has a population of almost
40 million. One country is classified as a middle-income developing country and as such is
(on a gross domestic product per capita basis) one of the richest sub-Saharan African
countries. The other is a low-income developing country and on GDP/per capita is one of
the poorest countries in the world. The heterogeneity of these variables ensures that the two
countries are quite different and in line with the objective of this study allows for focus and
comparisons of the operational efficiency levels of their banking sector.
5
First generation entry refers to entry which took place when the country was a colony. Second generation entry
refers to entry which has taken place as part of the deregulation and liberalisation process of the last 20 years.
DOI: 10.1002/jid
948 C. C. Okeahalam
2.1 Hypothesis Test
As explained above, in general, the literature suggests that foreign banks perform better
than domestic banks and though it has been the basis of policy—particularly in developing
countries—from the perspective of efficiency, the evidence is not conclusive. Given this, a
formal attempt is made herein to provide further clarity. This requires that we conduct a
basic hypothesis test: the null hypothesis.
H0. The level of efficiency of foreign banks in Namibia and Tanzania is higher than that of
domestic banks, and the alternative hypothesis.
H1. Foreign banks are not more efficient than domestic banks, therefore their entry is not likely
to result in an improvement in performance by firms in the domestic market.
The outcome of this hypothesis test is either reject H0 in favour of H1, or do not
reject H0.
3 A BRIEF OVERVIEW OF THE BANKING SECTOR

IN NAMIBIA AND TANZANIA
As mentioned earlier, a key issue in internationalisation and firm performance is the extent
to which a few firms are influential players in the market. In sub-Saharan Africa, four bank
conglomerates, Barclays Bank, Citibank, Standard Bank Investment Corporation
(STANBIC) and Standard Chartered Bank (SCB) have extensive operations.6 And as
can be seen in Table 1, in Namibia and Tanzania, a small number of banks have significant
shares of the market. Accordingly, concentration ratios and Herfindahl–Hirschman Index
(HHI) of the two markets have been calculated. The banking sector in Tanzania appears to
have a slightly more competitive industry structure than that of Namibia.7
Namibia and South Africa have had a long historical and political relationship. Namibia
was previously known as South–West Africa and became a German colony/protectorate in
1884. In 1915, South–West Africa was occupied by South Africa which governed it under a
League of Nations mandate from 1920 to 1946. South Africa refused to accept the United
Nations trusteeship that replaced the mandate. Namibia obtained independence from South
Africa in 1990.
6
Standard Bank Investment Corporation operates in Botswana, the DRC, Ghana, Kenya, Lesotho, Malawi,
Mauritius, Namibia, Nigeria, South Africa, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. In
Namibia, Swaziland, South Africa, Lesotho, Mauritius and Mozambique, these banks are branded as ‘ Stanbic’.
Standard Bank also has a representative office via Union Commercial Bank in Madagascar.Barclays Bank has
subsidiaries in Botswana, Egypt, Ghana, Kenya, Nigeria, South Africa, Tanzania, Uganda, Zambia and
Zimbabwe. Standard Chartered Bank operates in Botswana, Cameroon, Egypt, Gambia, Ghana, Kenya, Ivory
Coast, Nigeria, Sierra Leone, South Africa, Tanzania, Uganda, Zambia and Zimbabwe.City Bank has operations in
Cameroon, Gabon Gambia, Ghana, Kenya, C’ote D’Ivoire, Nigeria, Senegal, South Africa, Tanzania, Uganda, and
Zambia. Citibank also has affiliations in 23 other countries including Angola. These are classified as non-presence
countries.
7
HHI is based on the sum of square of market shares of (output) all firms in the industry. In the calculation of HHI
we used four different measures of market share in banking–total assets, total deposits, total loans and total share
capital to compute a Herfindahl–Hirschman Index HHI. The HHI results indicate high concentration. In sum, the
data indicate high levels of concentration in bank services in Namibia and in South Africa. The market in Tanzania
is less concentrated. This is a point, which is also made by Okeahalam and Adams (2000) and Okeahalam (2004b).
To save space the tables are not presented here but are available from the author if required.
DOI: 10.1002/jid
Table 1. Country of ownership of majority/controlling shareholder, date of entry and market share
in 1998–2003
Namibia Tanzania
Bank and date Country of Market Share Bank and date Country of Market
of entry majority shareholder (%)* of entry majority share (%)
and date shareholder
and date
Bank Windhoek Namibia 1984 13 Barclays Bank 2000 United Kingdom 10

CSIB** Namibia 1993 5** Citi Bank 1995 USA 12
CBN** Namibia**** France 10 CRDB**** 1996 Tanzania 15
FNB South Africa 1915 34 NBC 2000 South Africa 19
Standard Bank South Africa 1915 32 SBT***** 1995 South Africa 8
of Namibia
SWABOU Namibia 6 SCT****** 1917 United Kingdom 16
Others NA Others 18
Source: Bank of Namibia, South African Reserve Bank and Bank of Tanzania and annual reports of banks.
Notes:
*Market share is calculated as the average of the total sum of product revenues divided by the level of revenues
accrued by each bank over the 5-year period 1998–2003.
**CSIB was subjected to curatorship by the central bank (Bank of Namibia) during this period and its activities
were greatly restricted.
***Both countries owned exactly 47.1% of CBN. In 2005, the South African Bank Nedbank acquired a controlling
shareholding.
****70% of CRDB is owned by a very broad base (about 11 000) of Tanzanian individuals and some corporate
groups. DANIDA owns 30%.
*****In 1995 Stanbic Bank Group acquired the operations of Meridien Biao Bank Tanzania Limited to form SBT.
Standard Chartered first entered Tanzania in 1917. Its operations were nationalized in 1967 and it re-entered in
1993.
The post-independence commercial banking ownership structure still has very strong
links with South Africa. Over the period of the study (1998–2003), Namibia had five
commercial banks, Bank Windhoek (BW),8 Commercial Bank of Namibia (CBN), First
National Bank (FNB), Standard Bank of Namibia (SBN) and SWABOU. Namibia’s
financial sector is relatively liberalised but unsophisticated. The banking and insurance
sectors are currently dominated by South African institutions.9 The shareholding of SBN is
100% South African. South African ownership in three other banks ranges from 43.6%
(BW) and 47% (CBN), to 78% (First National Bank). Namibian equity is held in only two
banks, BW (56%) and the CSIB (100%). The strong links with South Africa continues to be
maintained through structures like the Common Monetary Area (CMA) and the Southern
African Customs Union (SACU). And despite the fact that there are few restrictions on
entry, with the exception of the French shareholding in CBN, there is no other (non-South
Africa) foreign ownership in the Namibian banking sector. As Ben et al. (2006) indicate,
FNB and SBN or their direct corporate predecessors have been in Namibia since 1915.
Table 1 indicates that 82% of the market share is controlled by the three largest banks and
two banks control approximately 65% of the market share. Invariably, this duopoly act as
8
Amalgamated Banking Group of South Africa (ABSA) owns 47% of BW and in October 2005, Barclays Bank
acquired approximately 60% of ABSA.
9
In South Africa, the commercial retail banking sector is modern and relatively sophisticated. It has four dominant
firms; STANBIC, First National Bank (FNB) and Nedcor Bank Limited (NEDCOR). Market shares in most
product categories are fairly evenly distributed among them. An n-firm concentration ratio was also calculated and
the data indicate that 86% of the market is controlled by them.
DOI: 10.1002/jid
950 C. C. Okeahalam
price leaders and determine the trend in retail interest rates. As at December 2003, the total
assets of the five banks were valued at approximately N$15.8 billion. Commercial Banks
account for approximately 42% of total financial assets. Loans and advances constitute by
far the largest proportion of total assets, while deposits composed of demand, savings and
time deposits make up a large part of total liabilities. Around 90% of total credit to the
private sector is provided by the commercial banks. Most bank branches are still located in
the urban areas, with the capital, Windhoek, accounting for close to 35% of the total and
Standard Bank and First National Bank own 53% of branches.
From the time it obtained independence from Britain in 1961, until 1993, Tanzania was a
socialist country. The financial sector was controlled by the state. Accordingly, foreign
entry in the banking sector is a recent phenomenon. There are now 22 commercial banks,
however the top six banks control approximately 87% of total deposits. As can be seen in
Table 1 above, the top 6 banks in order of market share are: National Bank of Commerce
(NBC), Standard Chartered (SCT), Community Rural and Development Bank (CRDB),
Citibank (CB), Standard Bank Tanzania (SBT) and Barclays Bank Tanzania (BBT).
Two of the top six, NBC and CRDB have significant domestic share holdings either via
the government, aid agencies or the Tanzanian private sector. The other four, are foreign
owned. The banking market is still relatively small. At the end of 2003, total loan assets
were US $710 million with deposits of $1.74 billion. Loan asset growth increased by US
$61 million in the year to December 2003.
The foreign bank share of total deposits is small. For the most part with the exception of
NBC in which (the South African Bank) ABSA has a controlling stake–foreign banks
operate in the wholesale sector bank and hence do not benefit from a large retail deposit
base.10 In addition, foreign banks are dependent on the wholesale deposit market and have
a significant exposure to a small number of key depositors. Some foreign banks in
particular, SBT and BBT pay above market rates to attract deposits. Despite this, their
market share continues to be relatively small. This impacts on the cost of funding for
foreign banks as they attempt to raise deposits in a market dominated by the domestic
banks. As a result the foreign banks are very active in the treasury market and use this to
compensate for the higher cost of funding which they face. However large corporations
tend to convert all surplus funds into foreign currency to hedge exchange rate risk—but
still borrow in Tanzania shillings. This places liquidity constraints on the international
banks that do not have a local currency deposit base.
The domestic banks, in particular NBC and CRDB, have a relatively lower cost of
funding via their extensive branch network they have access to a large, fairly price inelastic
customer base.11 This presents the domestic banks with a competitive advantage–CRDB
and NBC continue to dominate the local currency deposit market.12
At the operational level, the difference of running a retail and wholesale bank can be
seen in the level of average cost of inputs. For example, SCB and Citibank generate
the highest revenue per employee mainly due to the very high contribution of their
respective corporate treasuries. On the whole, over the last 5 years, the average cost to
income ratio in Tanzania has dropped significantly. CRDB and NBC have the lowest cost
10
ABSA owns 55%, the Government of Tanzania owns 30% and the International Finance Corporation owns 15%.
11
NBC has 35 branches.
12
Over the last 5 years, CRDB has managed to substantially increase it’s customer deposit base. The development
and effective marketing of the smart card TEMBO product has contributed to this, 100 000 cards have been issued
since the product launch in the July 2003. In addition given their more extensive branch network, the Tanzanian
government use the CRDB and NBC, for money transfers.
DOI: 10.1002/jid
per employee. This is partly due to the much larger workforce that they employ and the
lower salary ranges. Over the last 2 years, the average cost per employee has increased as
NBC has replaced some of its workforce with new employees from the market. Given the
wholesale nature of their business, Citibank and SCB have a relatively smaller number of
highly skilled employees.
In sum, in Tanzania, the domestic banks are dominant in retail banking while foreign
banks play a more significant role in the wholesale market and derive a significant
proportion of their profits from treasury operations.
4 DESCRIPTION OF THE DATA SET
The data for this study are from the Southern African Financial Services Sector (SAFSS)
data base, published reports of the Bank of Namibia and the Bank of Tanzania and a
number of commercial banks in Tanzania and Namibia. The data set is a balanced panel
data set with observations from 1998 to 2003. The Namibia data are based on observations
on the five main banks. The data on Tanzania are based on data from the six main banks.
The SAFSS is a panel data set, which has been developed by Benefit Advisory Research
in Johannesburg, South Africa and contains data on Botswana, Namibia and South Africa.
It is also a composite of observations derived from three other data sets: the Trade and
Industry Policy Secretariat (TIPS) in Johannesburg, the South African Reserve Bank
(SARB) and KPMG, the auditing firm.13 The TIPS data set contains data for the aggregate
financial sector (including the banking sector, insurance sector and other financial services)
for the period 1970–2003. It also has aggregate macroeconomic data. A number of
descriptive variables are included and in particular product input and output data. The
data set also has observations on variables of fixed inputs such as buildings and machinery,
transport equipment, motor vehicles, parts and accessories and on capital inputs such as
consumption of fixed capital, the fixed capital stock output ratio and fixed capital
productivity. In addition to this, there is comprehensive input data on employment unit
labour cost and productivity. The SARB database contains data on both individual banks
and the aggregate banking sector as a whole. The individual banking data encompasses
data on: deposits, inter-bank funding, loans, government deposits, short-term financial
market instruments, medium- and long-term financial instruments, non-financial assets and
intangible assets. The KPMG data are derived from the KPMG Banking in Africa Survey
which is conducted on an annual basis. The survey contains fairly comprehensive
firm-level data on variables such as cost-to-income ratios, assets and liabilities, financial
ratios on solvency, liquidity, profitability, trading activity and market share statistics.
5 FINANCIAL ANALYSIS OF MEASURES OF

EFFICIENCY AND PERFORMANCE
Recall that the literature review above, explained that various methods have been used to
assess the impact of FDI and internationalisation and performance. A corollary of this is
that a number of researchers have moved from cross-section data to panel data sets. This
has enhanced the quality of model specification and allowed for the isolation and careful
13
TIPS is a research centre which is funded and controlled by the International Development Research Centre of
Canada. www.idrc.org.
DOI: 10.1002/jid
952 C. C. Okeahalam
study of a number of independent variables such as labour and technology and the presence
of multinationals in a market. Yet in most studies of internationalisation in banking, for
example, Pehlivan and Kirkpatrick (2001) and Claessens et al. (1998), researchers have
relied on financial returns as the primary criteria for performance. We also begin this
empirical study with a financial ratio analysis, but with particular emphasis on efficiency.
The means and standard deviations of key financial performance indicators of banks in
Namibia and Tanzania for the period 1998–2003 are presented in Table 2 above. As can be
seen in both countries, the total assets of foreign banks is larger than that of domestic banks
and the lower standard deviation indicates that the growth rate was more uniform among
foreign banks than in domestic banks. Domestic banks in Namibia and Tanzania have a higher
proportion of fixed assets relative to total assets than foreign banks. But this is probably for
different reasons. In Tanzania, as mentioned earlier, the two large domestic banks have
extensive branch networks; foreign banks do not have a large number of branches. In addition,
in Namibia, in comparison to foreign banks, domestic banks have a large proportion of fixed
assets relative to a small total asset base. The standard deviation also indicates that this result is
more uniform among the foreign banks than it is in domestic banks.
With regards to measures of efficiency, it can be seen that in Namibia, the operating cost
to income ratio (C/I) for foreign banks is significantly higher than it is for domestic banks.
In Tanzania, there is an opposite situation in which, the C/I ratio for foreign banks is
significantly lower than that for domestic banks. In addition, the C/I for foreign banks in
Tanzania is much lower than that for foreign banks in Namibia. The standard deviation
suggests that most foreign banks in Tanzania have homogeneous high levels of efficiency
relative to domestic banks. Also while foreign banks in Tanzania appear to be relatively
efficient, domestic banks in Tanzania are less efficient than their counterparts in Namibia.
Although this runs somewhat contrary to expectations, a possible reason for this is that
labour costs are a significant proportion of the cost base; domestic banks in Tanzania have a
significant public sector ownership and labour productivity has been low. In addition, while
foreign banks tend to pay their workers more, revenue per employee is also considerably
higher.
Table 2. Descriptive statistics: means of financial performance indicators: 1998–2003
Variables Namibia Tanzania

Foreign Domestic Foreign Domestic
Total assets (TA) 9.7 Billion (0.38) 3.95 Billion (0.43) 47.34 Billion (4.12) 42.9 Billion (3.97)
Fixed assets/Total 1.4% (0.20) 1.9 (0.28) 0.9 (0.11) 1.34 (0.26)
assets (FA/TA)
Costs to income ratio 63.4 (2.93) 56.1 (2.07) 53.6 (1.61) 58.1 (1.39)
Operating costs/ Loan 4.31 (0.49) 3.38 (0.87) 2.47 (0.61) 2.82 (0.88)
advances (OC/LA)
Net interest 3.65 (0.29) 3.07 (0.53) 2.15 (0.82) 3.22 (1.10)
income/Assets (NIIA)
Fee income/Assets (FI/A) 1.20 (0.23) 0.96 (0.38) 2.49 (0.35) 1.41 (0.52)
Net profit/Assets (ROA) 2.94 (0.37) 1.61 (0.86) 2.21 (0.61) 1.88 (0.82)
No. of observations 3 2 2 4
Note: Numbers are in per cent. Standard deviations are in parentheses.

In Namibian dollars.

Tanzanian shillings.
DOI: 10.1002/jid
The operating costs to loan advances ratio (OCLA) confirms the fact that costs of foreign
banks in Namibia are much higher than that of domestic banks. However, in Tanzania,
foreign banks are more efficient. This can also be explained by the fact that in Tanzania,
domestic banks conduct proportionally more retail transactions than the foreign banks
which tend to be wholesale. In addition, foreign banks in Namibia have a relatively higher
level of interest income than domestic banks. Conversely foreign banks in Tanzania have a
smaller interest margin than their domestic counterparts. This appears to support the point
of the lack of access of foreign banks to the large branch network and relative price inelastic
deposit base of the major domestic banks.
The fee income over total assets ratio (FI/TA) indicates that foreign banks in Tanzania
make a much higher level of fee income than the domestic banks. They also derive a much
higher proportion of total income from fees in comparison to foreign banks in Namibia.
This is consistent with the fact that in Namibia, most transactions from which meaningful
fees could be obtained are referred to the parent company in South Africa.
On the whole, the return on assets ratio (ROA) indicates that foreign banks in Namibia
are more profitable than domestic banks. This is also the case in Tanzania—however the
difference in the level of returns of foreign relative to domestic banks is much smaller than
it is in Namibia. In addition the relatively low standard deviation for the foreign banks in
Namibia, indicates that there is not much variation in their level of profitability.
However, while financial ratios are a useful measure of performance, they do not provide
full and accurate insight on economic performance. For example, as is well known, high
levels of return can be achieved via monopolistic rents, in the presence of low levels of
efficiency. And for the most part, on aggregate, monopolies are inefficient—particularly in
developing countries. Given this, an attempt is also made to arrive at estimates of
efficiency.14
6 ECONOMETRIC MEASUREMENT OF EFFICIENCY

OF BANKS IN NAMIBIA AND TANZANIA
6.1 Estimation Methodology
As a first step in the modelling exercise a stochastic frontier model is estimated. This
approach has been extensively used to measure efficiency in banking. See Berger and
Humphrey (1997) for a review of this literature.15 Stochastic frontier analysis is a
non-parametric estimation technique which makes the assumption that the cost frontier
is stochastic in nature rather than deterministic.16 Stochastic frontier analysis also
makes the assumption that the movement by a firm away from this frontier is due to
14
A more detailed earnings before interest, taxes, depreciation, amortisation and rent (EBITDAR) analysis was
also attempted to explain for the possible differences in the activities of the foreign banks in Tanzania—which
derive larger proportion of their revenue from the corporate sector and domestic banks which do not. However
comparisons are difficult because the foreign banks in Namibia derive most of their profits from retail banking.
EBITDAR is also normally used to evaluate banks heavily involved in underwriting corporate leasing and
sale-leasebacks structuring. EBITDAR is relevant when companies with different accounting and lease policies
are compared however is of less use.
15
Okeahalam (2004a), (2005) and (2006) has used this approach in a number of studies on banking in Africa.
16
In general a stochastic frontier model has three components. The first component consists of a set of independent
variables. The second and third components are error related components, which are designated to capture
inefficiency and random disturbance effects, respectively.
DOI: 10.1002/jid
954 C. C. Okeahalam
inefficiency arising from factors under the firm’s control.17We estimate the following
functional form:
Cmt ¼ Xmt b þ Umt þ Vmt m ¼ 1; 2; 3; 4; 5 t ¼ 1998; . . . ; 2003 (1)
Cmt is the cost of mth firm at time t and includes items such as staff costs, commission
and agency fees, advertising, stationary, cost of utilities, property maintenance and
operating cost. Xmt is a vector of the independent variables and includes their squares and
interaction terms. The relationship between the dependent variable and independent
variables is captured by the cost function. Y is total output proxied by the total amount of
loans advanced.18 P is the price of inputs, subscripts i representing two inputs: labour and a
portmanteau of other inputs (without capital). The price of labour, P1, is computed as total
wages and personnel cost divided by the number of employees. The price of the
portmanteau factor, P2, is expressed as the remaining part of operating cost (after deduction
of wages plus depreciation) divided by total deposits of the firm.
Vmt is white noise disturbance term, which is iid and normally distributed with mean 0
and variance s2v. Umt is non-negative random variable, which is to account for the cost
inefficiency of ‘m’th form at time ‘t’. Umt is described by the function, Ui e-n(t-T), where Ui
which varies across units is assumed to be iid, and is truncated at zero of the N(m, s2u)
distribution (therefore only takes positive values), and the 2nd component is associated
with time path (dynamic changes) of inefficiency.19 The elaborated version of the above
model (1) is presented below without subscripts m and t.20
C ¼ b0 þ g y ln Y þ ð1=2Þg yy ðln YÞ2 þ b1 ln P1 þ b2 ln P2 þ ð1=2Þb11 ðln P1 Þ2

þ ð1=2Þb22 ðln P2 Þ2 b12 ln P1 ln P2 þ g y1 ln Y ln P1 þ g y2 ln Y ln P2 þ U þ V (2)
The measure of cost inefficiency (EFF) is defined as a conditional expectation thus:

EFFmt ¼ EðCmt =Umt ; Xmt Þ=EðCmt =Umt ¼ 0; Xmt Þ: Since cost, Cmt, was transformed into
natural log prior to estimation, Cmt ¼ eCmt and the inefficiency measure is eUmt. The cost
inefficiency value will, therefore, range between 1 and infinity, 1 being the cost inefficiency
of zero belonging to the best practice firm. The model imposes restrictions of homogeneity
and symmetry in Equation (2) and then is re-estimated without imposing any restrictions.
17
Battese and Coelli (1992) developed this specification and Worthington (1998) used a model with the same
specification to measure cost efficiency of Australian building societies.
18
In some studies, different loans enter as different output variables, for instance, commercial and industrial loans,
real-estate loans, and consumer loans enter separately as separate output variables. Also in some cases total
deposits are also decomposed into checking and time deposits, and used in conjunction with loans as other output
variables.
19
Some studies have used the Fourier Functional form, see Mitchell and Onvural (1996) and Okeahalam (1999) for
example.
20
The log likelihood function of the error terms (U þ V) with the distribution described earlier is used, which also
includes the parameterisation of ratio of variance of inefficiency score divided by total variance of error,
s u =ðs 2u þ s 2v Þ ¼ g; to derive the maximum likelihood estimates of b; s 2 ¼ ðs 2u þ s 2v Þ; and g (in which first the
2
likelihood function is maximized for a number of values of g between 1 and 0). The values obtained are fed as
initial values in an iterative maximization process, the Davidson-Fletcher-Powell (DFP) algorithm. The hypoth-
esis of the absence of cost inefficiency is conducted by testing the H0: g ¼ 0 (absence of cost inefficiency) vs. H1:
g > 0 (presence of cost inefficiency). A s2u close to zero, implies that g is also close to zero, and therefore there is
no variation in inefficiency which implies that all costs fall on the efficient frontier. Coelli (1995) suggested the use
of one-sided generalized likelihood ratio test for the hypothesis which has a mixed chi-square distribution.
DOI: 10.1002/jid
Table 3. MLE estimates of the cost model
Namibia Tanzania
Restricted Unrestricted Restricted Unrestricted

model model model model
Parameters Estimates (s-errors) Estimates (s-errors) Estimates (s-errors) Estimates (s-errors)

b0 3.449 (0.98) 25.001 (9.02) 3.216 (0.96) 24.091 (8.60)
gy 8.484 (0.61) 0.92 (2.09) 8.484 (0.60) 0.97 (2.02)
g yy 0.370 (4.923) 7.7016 (0.13) 0.365 (4.923) 7.696 (0.11)
b1 11.893 (1.19) 5.227 (4.79) 11.433 (1.02) 5.290 (4.86)
b2 10.772 (3.90) 10.761 (3.84)
b11 0. 891 (0.247) 0.3 73 (0.19) 0.910 (0.241) 0.369 (0.14)
b22 0.371 (0.255) 0.368 (0.260)
b12 0.068 (0.437) 0.060 (0.423)
g y1 0.310 (0.19) 0.614 (0.271) 0.293 (0.14) 0.608 (0.269)
g y2 0.492 (0.31) 0.497 (0.23)
Sigma-squared 0.05 (0.018) 0.120 (1.29) 0.04 (0.013) 0.114 (1.23)
Gamma 0.945 (0.026) 0.971 (0.006) 0.937 (0.028) 0.993 (0.002)
M 0.407 (0.160) 0.778 (0.20) 0.389 (0.163) 0.673 (0.14)
N 0.057 (0.026) 0.081 (1.207) 0.053 (0.026) 0.082 (1.011)
Log-likelihood 32.12 47.28 31.59 46.77
LR-test with 3 restrictions 30.23 41.08 29.06 39.17
() ¼ Standard errors.

Significant at the 10% level.


Significant at the 1% level for unrestricted models: the estimates of g yy, b11, b22, b33 listed in the table are
actually estimates of each g yy, b11, b22, b33 divided by 2.
6.2 The Results
In Table 3 below, we can see that the restricted and the unrestricted estimates of efficiency
are quite similar. The large value for gamma in both models is indicative of the fact that
there is technical inefficiency in all the markets analysed.21 The variance in technical
inefficiency relative to variation of unexplained error is quite large. It is worth noting that
the inclusion of a large number of regressors, especially in the unrestricted equation, and
small number of observations may have bearing on the unrestricted model in terms of
wrong signs and larger standard errors. The likelihood ratio test values of 30.23–41.08
(Namibia) and 29.06 and 39.17 (Tanzania) for the restricted and unrestricted models
respectively, show that these values are higher than the critical value (for mixed chi-square
distribution) and this confirms the significance of the gamma measure. The log-likelihood
estimate also indicates that the model is statistically robust.
In Table 4, we present inefficiency scores and ranking results for the sample period.
Firstly, we find that the cost inefficiency scores derived from the restricted and the
unrestricted models do not differ greatly. The fourth column of Table 4 indicates that in
21
The level of technical efficiency of a particular firm is determined by the relationship between observed
production and some ideal or potential production. Deviations of observed output from the best production or
efficient production frontier is the measure used to determine the level of firm-specific technical efficiency. The
ratio of actual to potential production defines the level of efficiency of the individual firm so, if the actual
production level lies on the frontier it is perfectly efficient and if it lies below the frontier then it is technically
inefficient.
DOI: 10.1002/jid
956 C. C. Okeahalam
Namibia, SWABOU is the most efficient bank followed by, CBN, BW, FNB, SBN,
respectively. We also find that the order of ranking of efficiency is inversely related to the
size of the banks. SBN and FNB, which are both subsidiaries of South African banks are
the largest banks and are also the most inefficient banks in Namibia. This is consistent with
the results of the financial analysis in Table 2.
In Tanzania, we find that the foreign banks are more efficient than domestic banks. In
particular, Citibank, with its relatively limited branch network is the most efficient bank
and leads the other banks in the following order: SCT, BBT, SBT, NBC and CRDB. NBC
has the largest branch network, however it is more efficient than the other bank with a
significant branch network, CRDB- so the level of efficiency is not entirely dependent on
(and inversely related to) the size of the branch network.
To further test our results, a translog cost function of Model 1 was estimated for each
banking market. Dummy variables were added to Equation (2), and j is the stochastic
disturbance term. Equation (2) has been estimated by the feasible generalised least square
(FGLS) method suitable for seemingly unrelated regressions (SUR).22 The inefficiency
estimates of Equation (2) are presented in Table 5. The variables are as defined earlier. In
the translog model, we replace the inefficiency term U which was used in the stochastic
model with a series of dummy variables which represent the banks in each market. For
example, in Tanzania we have five dummies D1–D5 which represent each of the banks. The
dummy for Citibank is omitted from the model, because it is used as the reference/
benchmark bank from which cost comparisons are made.
All the dummy variable coefficients are positively significant and reinforce the results which
we obtained in the inefficiency rankings in Table 4. In Table 5, the estimates of inefficiency also
confirm that on average, Citibank is the most cost efficient bank in Tanzania. In comparison, the
cost intercepts for the other banks are higher. If we place the cost intercept in order of values
from lowest (most efficient) to highest (least efficient), we get the following ordering: Citibank
(9.77), SCT(9.77 þ 0.218 ¼ 9.55), BBT(9.77 þ 0.326 ¼ 9.44), SBT(9.77 þ
0.355 ¼ 9.41), NBC (9.77 þ 0.461 ¼ 9.30), CRDB (9.77 þ 0.533 ¼ 9.21) This
further supports the assertion that foreign banks in Tanzania are more efficient than domestic
banks. However the estimates for Namibia–SWABOU (8.51), BW(8.51 þ 0.306 ¼ 8.20),
0.306 ¼ 8.20), CBN(8.51 þ 0.398 ¼ 8.11), FNB(8.51 þ 0.615 ¼ 7.89) and SBN
(8.51 þ 0.677 ¼ 7.83)–fit the inefficiency score and rankings presented in Table 4 and
confirm that SWABOU is the most efficient bank and that foreign banks are less efficient than
the domestic banks.23
Given the results presented in Table 5, measures of economies of scale for each bank
were estimated and are presented in Table 6. In simple terms, economies of scale refer to
the rate of increase in output in comparison to the rate of increase in cost. If costs increase at
a proportional rate to output, then there are no economies of scale; if costs increase by a
lesser amount, there are positive economies of scale, and if costs increase by a greater
amount, there are diseconomies of scale. In Namibia, the estimates for the two large foreign
banks are all in the in the range of 0.7–0.8. Thus for every 1% increase in costs, output
22
In feasible generalized least squares we use an estimated covariance matrix, not an assumed one as is done in the
generalised least squares (GLS).
23
The only difference is that the estimates places BW ahead of CBN, whereas the earlier inefficiency score and
rankings place CBN ahead of BW.
DOI: 10.1002/jid
Table 4. Mean inefficiency score and ranking for 1998–2003
Namibia Tanzania
Banks Average Average Rank Banks Mean Mean Rank
Copyright # 2008 John Wiley & Sons, Ltd.

score score score–restricted score–un-restricted
restricted un-restricted model model
model model
SWABOU 1.598 1.948 1 Citibank Tanzania (CBT) 1.517 1.822 1
Commercial Bank 1.804 2.177 2 Standard Chartered Tanzania (SCT) 1.690 1.913 2
of Namibia (CBN)
Bank Windhoek (BW) 1.977 2.137 3 Barclays Bank Tanzania (BBT) 1.892 2.227 3
First National Bank (FNB) 2.254 2.302 4 Standard Bank Tanzania (SBT) 1.910 2.326 4
Standard Bank Namibia (SBN) 2.304 2.683 5 National Bank of Commerce (NBC) 2.055 2.316 5
CRDB Ltd 2.107 2.387 6
Internationalisation and Firm Performance
957
J. Int. Dev. 20, 942–964 (2008)

DOI: 10.1002/jid
958 C. C. Okeahalam
Table 5. Estimates of inefficiency
Restricted Model Namibia Tanzania
Parameters Estimates (s-errors) Estimates (s-errors)

b0 8.513 (16.12) 9.771 (14.19)
gy 1.915 (2.22) 1.942 (2.09)
g yy 0.026 (0.03) 0.019 (0.08)
b1 0.680 (0.37) 0.672 (0.10)
b2 0.351 (0.11) 0.320 (0.09)
b11 0.071 (0.029) 0.051 (0.009)
b22 0.054 (0.006) 0.052 (0.010)
b12 0.120 (0.044) 0.121 (0.52)
g y1 0.081 (0.32) 0.083 (0.21)
g y2 0.080 (0.28) 0.082 (0.17)
D1Bank 0.398 (0.11) 0.218 (0.09)
D2Bank 0.306 (0.15) 0.326 (0.13)
D3bank 0.615 (0.12) 0.355 (0.19)
D4Bank 0.677 (0.19) 0.461 (0.22)
D5Bank 0.533 (0.27)
R2 0.99 0.98
DW 1.57 1.55
() ¼ Standard errors.



Significant at the 1%.
increases at a rate of between 0.7 and 0.8%. However, the other banks are more efficient, in
particular SWABOU which has estimates ranging from 0.85 to 1.04, almost achieving
positive economies of scale. It can also be seen that over time the productivity of the
domestic banks has improved. However the productivity of the foreign banks has not and in
the case of FNB it has actually decreased.
In Tanzania, the situation is different, in that the foreign banks have higher scores than
the domestic banks. It can also be seen that all the banks have improved their level of
productivity over time. And although the domestic banks lag the foreign banks, they are
improving their productivity. Of the two domestic banks, NBC has been the better
performer. At the start of the sample period (1998), it had a score of 0.76 but by 2003 it had
a score of 0.93. This is an improvement in cost productivity of 18.3%. The corresponding
figure for CRDB is 6.9%. So it can be seen that in general, the rate of increase in output is
less than the rate of increase in cost.
This situation of diseconomies of scale is a function of a number of factors. For the large
foreign banks in Namibia, it is probably because of insufficient competition, complacency
and possibly, relatively poor management. For the domestic banks in Namibia the cause is
possibly due to aspects of the competitive environment and also factors such as inadequate
technology and systems. In Tanzania, the results suggest that foreign banks, although more
efficient than the domestic banks–are somewhat complacent. And although the domestic
banks are more inefficient they appear to be making significant strides in efficiency—
despite the fact that they have a retail focus. This suggests some aspects of a strategic
emphasis on cost control and a reasonably well implemented reform process by capable
management.
DOI: 10.1002/jid
Table 6. Economies of scale
Namibia Tanzania
Year Bank Economies Bank Economies

of Scale of Scale
1998 BW 0. BBT 0.87

1999 0.81 0.99
2000 0.81 0.89
2001 0.83 0.89
2002 0.88 0.89
2003 0.92 0.96
1998 FNB 0.76 CBT 0.89
1999 0.76 0.98
2000 0.76 1.02
2001 0.77 1.05
2002 0.76 1.09
2003 0.76 1.07
1998 CBN 0.79 CRDB 0.81
1999 0.81 0.84
2000 0.86 0.83
2001 0.87 0.84
2002 0.91 0.87
2003 0.91 0.87
1998 SBN 0.77 NBC 0.76
1999 0.76 0.76
2000 0.76 0.87
2001 0.75 0.89
2002 0.75 0.91
2003 0.75 0.92
1998 SWABOU 0.86 SCT 0.78
1999 0.88 0.79
2000 0.95 0.80
2001 0.99 0.89
2002 1.03 0.95
2003 1.04 0.98
1998 — — SBT 0.90
1999 — — 0.91
2000 — — 0.92
2001 — — 0.91
2002 — — 0.94
2003 — — 0.91
7 CONCLUSIONS AND POLICY IMPLICATIONS
This study has used the concept of efficiency as the basis of the evaluation of firm
performance within the context of internationalisation. The concept of efficiency is relative
and sample dependent. And although we have used a relatively small sample of firms, via
the use of a balanced panel data set–this study has successfully estimated a number of
measures of efficiency and made comparisons of banks in two SSA countries.
The country of origin of entrants in the Tanzania banking sector has been more
heterogeneous than that in Namibia—which has been entirely from South Africa. South
African firms own or control large parts of the Namibian financial services sector. However
they have only recently entered the banking sector in Tanzania–in which (as explained
DOI: 10.1002/jid
960 C. C. Okeahalam
earlier) there are a number of other foreign banks. So could it be that there is a need for
dispersion in the national origin of foreign entrants for positive economies to accrue.
In Namibia SBN and FNB–the two major banks–are controlled by South African parent
companies and do not face much competition. In addition both major banks in Namibia
enjoy a high rate of financial return but as the econometric analysis above has illustrated
they are relatively inefficient. Accordingly, if the neoclassical theory findings of Meade
held they would have been acquired—however they have not been. Perhaps in line with To
and Tripe (2002), this is because they are subsidiaries of large parents. On the other hand, as
predicted in the operating efficiency theory (McGuckin and Nguyen, 1995), SWABOU, the
most efficient of the Namibian banks, over the sample period of this study (1998–2003)
was subsequently acquired by FNB in 2004.
Furthermore, the fact that entry by South African banks has not improved the
performance of banks in Namibia points to a number of other issues on internationalisation
and firm performance. Firstly, internationalisation of its own is not sufficient for improved
performance. In other words, there are limited gains to performance just by foreign entry.
Therefore, policy makers need to ensure that entrants and their management are of high
quality (not monopolists seeking the ‘quiet life’)–and are indeed capable of transferring
technology and skills and not just scale. Scale in banking is clearly correlated with
stability—which is a worthwhile social good—however the supply of this good is
sometimes paid for by consumers via the cost of monopolistic pricing. Secondly, given the
origin of both the South African and Namibian shareholders, although not tested explicitly
herein, the anecdotal evidence indicates that the generation of internationalisation may be a
significant determinant of performance. Indeed as the results for Tanzania indicate, more
recent FDI and entry may be more productive than 1st generation entry, which may have
started to operate as domestic firms or in a manner designed to protect itself from potential
entry by more efficient new generation internationalisation.
This finding is consistent with entry and behaviour based primarily on the desire to
transfer a monopoly structure and derive economic rents. The results also seem to suggest
that Namibia has two banking sectors: a sector of small domestic banks which seem to
compete among themselves and another sector which is served by a foreign duopoly. Thus
a key finding is that lack of competition has hampered efficiency and that therefore third
generation internationalisation may lead to greater efficiency in the domestic banking
system of Namibia. Therefore the analysis rejects H0 in favour of H1. This leads to the
conclusion that the alternative hypothesis may be true and the results of this study support
the findings of Pehlivan and Kirkpatrick (2001) in Turkey, Yeyati and Micco (2003) and
Bonin et al. (2003); foreign banks do not appear to be significantly more cost efficient than
domestic banks, foreign entry does not necessarily make markets more competitive or
efficient and that this is particularly so in instances in which the market (of entry) is already
concentrated.
In general, internationalisation in banking is expected to lead to a number of benefits to
users and the economy as a whole. These include reduced costs of service to savers and
borrowers via the introduction of more competition and improvements in services and
more efficient institutions. Evidence from countries that have been through inter-
nationalisation are that entry by foreign banks causes all market participants to learn to
exploit economies of scale and scope, and reduce inefficiency.
However our empirical analysis herein indicates that while the level of profits in both
markets (Namibia and Tanzania) is high, the lack of competition particularly in Namibia
encourages the persistence of high overhead costs. Our conclusion based on these results is
DOI: 10.1002/jid
that entry by banks from South Africa has not had a positive spillover on the efficiency
performance of banks in Namibia. This fits with the perspective that entry by inefficient
dominant firms (i.e. firms that are monopolies or at least mirror monopolies in their
behaviour) is unlikely to result in improved efficiency in domestic markets.
To the best of my knowledge, this is the first study to use econometric methods to assess
and compare the impact of internationalisation on the efficiency of banks in two countries of
sub-Sahara Africa.24 As a result it provides some novel contributions to the literature. In sum,
the first key insight of this paper is that first generation internationalisation may have less
impact on efficiency than more recent foreign entry. While this is consistent with theory and
may be somewhat trite, there was nevertheless, a need to subject it to some form of empirical
test, albeit indirectly. Secondly, the nature of the competitive environment from which the
foreign entrant comes from is likely to provide insights as to its capacity to generate positive
spillovers and improve firm performance in the domestic market. Thirdly, the industry
structure in the acquiring and acquired market is a more significant determinant of positive
spillovers of internationalisation than the level of efficiency of firms being acquired.
Finally, the study has some limitations–which may also point to useful areas for further
enquiry. While it compares efficiency in more than one country it does not do a before entry
(ex ante) and after entry (ex post) analysis. There is a need to attempt to capture other
aspects of banking performance and possibly a full credit cycle. The absence of some
strategic firm level variables is also an obvious gap and a much finer grained analysis of the
impact of internationalisation in specific product markets and/or lines of business might
yield other insights—this is true whether we are considering the paper from a public policy
point of view or from a competitive strategy point of view. Allied to this, as Kelley et al.
(2006) illustrate, if positive economic spillovers are to accrue, we should also be concerned
with issues of culture, and other less tangible variables, which also need to be considered.
There is therefore a need to attempt to gather more data so as to reduce the level of
aggregation of the data that has been used herein and the appropriateness of the
longitudinal frame. A more detailed data set would enable efficiency to be measured in
terms of both centralized back office functions and at the specific product lines. This could
be done by considering the impact of foreign banks on specific types of loans and other
products. However these would be a worthy endeavour because linking the economics of
spillovers to the assessment of internationalisation is essential–since both topics are
concerned with the performance and competitive implications of foreign ownership, the
costs and benefits of these processes and how they are managed.
ACKNOWLEDGEMENTS
The first draft of this paper was written as part of a background paper to review the financial
policy framework to enable Namibia to make an offer to the WTO. I am grateful for the
financial and administrative support and comments provided by the Research Department
of the Bank of Namibia and the comments of Charles Inyangete of the Institute for Finance
Management, Dar-Es-Salaam, Tanzania. I acknowledge with gratitude the able research
assistance of Kofi Afful. The views, comments and any errors which may remain herein are
mine.
24
The study by Okeahalam (2004a) uses bank branch data and data envelopment analysis (DEA) to assess
efficiency of foreign and domestically owned bank branches in Botswana and Uganda but does not consider
internationalisation in the same detail.
DOI: 10.1002/jid
962 C. C. Okeahalam
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Internationalisation and Firm Performance: Evidence From Estimates of Efficiency in Banking in Namibia and Tanzania

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10991328, 2008, 7, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/jid.1455 by University Of Glasgow, Wiley Online Library on [15/11/2022].

INTERNATIONALISATION AND FIRM

Keywords: internationalisation; performance; efﬁciency; competition; banking; Namibia;

Copyright # 2008 John Wiley & Sons, Ltd.

2 PRODUCTIVITY AND INTERNATIONALISATION—A BRIEF

2.1 Hypothesis Test

3 A BRIEF OVERVIEW OF THE BANKING SECTOR

Bank Windhoek Namibia 1984 13 Barclays Bank 2000 United Kingdom 10

4 DESCRIPTION OF THE DATA SET

5 FINANCIAL ANALYSIS OF MEASURES OF

Table 2. Descriptive statistics: means of ﬁnancial performance indicators: 1998–2003

Variables Namibia Tanzania

Note: Numbers are in per cent. Standard deviations are in parentheses.

6 ECONOMETRIC MEASUREMENT OF EFFICIENCY

6.1 Estimation Methodology

Cmt ¼ Xmt b þ Umt þ Vmt m ¼ 1; 2; 3; 4; 5 t ¼ 1998; . . . ; 2003 (1)

C ¼ b0 þ g y ln Y þ ð1=2Þg yy ðln YÞ2 þ b1 ln P1 þ b2 ln P2 þ ð1=2Þb11 ðln P1 Þ2

The measure of cost inefﬁciency (EFF) is deﬁned as a conditional expectation thus:

Table 3. MLE estimates of the cost model

Restricted Unrestricted Restricted Unrestricted

Parameters Estimates (s-errors) Estimates (s-errors) Estimates (s-errors) Estimates (s-errors)

6.2 The Results

Banks Average Average Rank Banks Mean Mean Rank

Copyright # 2008 John Wiley & Sons, Ltd.

J. Int. Dev. 20, 942–964 (2008)

Table 5. Estimates of inefﬁciency

Restricted Model Namibia Tanzania

Parameters Estimates (s-errors) Estimates (s-errors)

Table 6. Economies of scale

Year Bank Economies Bank Economies

1998 BW 0. BBT 0.87

7 CONCLUSIONS AND POLICY IMPLICATIONS

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