The Uncertain Promise of Foreign Bank Entry: Institutional Quality Effects on the Foreign Bank–Financial Inclusion Nexus

Despite the precipitous rise in foreign bank presence due to ever increasing financial globalization, the literature on the nexus between foreign banks and financial inclusion remains critically underdeveloped. This paper revisits the relationship between foreign bank presence and financial inclusion in emerging and developing economies (EMDEs), extending the methodology of Gopalan and Rajan (2018) by integrating updated ownership data from Panizza (2024) and introducing institutional quality as a moderating variable. Employing both fixed effects and system generalized method of moments on a panel dataset of 128 EMDEs, this study finds that foreign bank presence has a far more ambiguous effect on the outreach and usage dimensions of financial inclusion than previously assumed. Foreign banks only enhance financial inclusion when interacted with measures of banking-sector institutional quality, highlighting the crucial role of institutional credibility in enabling inclusive financial intermediation. While partial replication confirms their findings under original conditions, results diverge substantially from Gopalan and Rajan (2018) when using the Panizza (2024) dataset and excluding the Global Financial Crisis period. This study recommends that foreign bank entry liberalization efforts be accompanied by targeted improvements in banking sector governance to strengthen the absorptive capacity of domestic financial systems.