Bank ownership, credit and local economic growth

Abstract

We test for impact of bank ownership differences on the relationship between financial development and economic growth at local level with a unique panel data. Using instrumentation techniques, we find that credit availability positively affects economic growth at a local level. While credit from state owned banks, private banks and foreign banks, all contribute to local economic growth, credit from private and foreign banks have a significantly higher impact on economic growth compared to credit from state owned banks. However, in rural areas where private and foreign banks have limited presence, credit from state owned banks significantly contribute to local economic growth. Our findings are robust under different specifications and sub-samples.