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Financial Development, Bank Ownership, and Growth. Or, Does Quantity Imply Quality?

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  • Shawn A. Cole

    ()
    (Harvard Business School, Finance Unit)

Abstract

In 1980, India nationalized its large private banks. This induced different bank ownership patterns across different towns, allowing credible identification of the effects of bank ownership on financial development, lending rates, and the quality of intermediation, as well as employment and investment. Credit markets with nationalized banks experienced faster credit growth during a period of financial repression. Nationalization led to lower interest rates and lower quality intermediation, and may have slowed employment gains in trade and services. Development lending goals were met, but these had no impact on the real economy.

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Bibliographic Info

Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 09-002.

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Length: 47 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:hbs:wpaper:09-002

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  1. Robin Burgess & Rohini Pande, 2004. "Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment," The Centre for Market and Public Organisation, Department of Economics, University of Bristol, UK 04/104, Department of Economics, University of Bristol, UK.
  2. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  3. Robin Burgess & Rohini Pande & Grace Wong, 2005. "Banking for the Poor: Evidence From India," Journal of the European Economic Association, MIT Press, MIT Press, vol. 3(2-3), pages 268-278, 04/05.
  4. Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
  5. Shawn Cole, 2009. "Fixing Market Failures or Fixing Elections? Agricultural Credit in India," American Economic Journal: Applied Economics, American Economic Association, American Economic Association, vol. 1(1), pages 219-50, January.
  6. Sapienza, Paola, 2004. "The effects of government ownership on bank lending," Journal of Financial Economics, Elsevier, Elsevier, vol. 72(2), pages 357-384, May.
  7. Rafael La Porta & Florencio Lopez-deSilanes & Andrei Shleifer, 2000. "Government Ownership of Banks," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1890, Harvard - Institute of Economic Research.
  8. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  9. Asim Ijaz Khwaja & Atif Mian, 2005. "Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(4), pages 1371-1411, November.
  10. Chamberlain, Gary, 1987. "Asymptotic efficiency in estimation with conditional moment restrictions," Journal of Econometrics, Elsevier, Elsevier, vol. 34(3), pages 305-334, March.
  11. Abhijit V. Banerjee & Shawn Cole & Esther Duflo, 2004. "Banking Reform in India," India Policy Forum, Global Economy and Development Program, The Brookings Institution, Global Economy and Development Program, The Brookings Institution, vol. 1(1), pages 277-332.
  12. Banerjee, Abhijit & Duflo, Esther, 2004. "Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4681, C.E.P.R. Discussion Papers.
  13. Craig O. Brown & I. Serdar Dinç, 2005. "The Politics of Bank Failures: Evidence from Emerging Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(4), pages 1413-1444, November.
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Cited by:
  1. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2013. "Size and age of establishments: evidence from developing countries," Policy Research Working Paper Series 6718, The World Bank.
  2. Bertay, Ata Can & Demirguc-Kunt, Asli & Huizinga, Harry, 2012. "Bank ownership and credit over the business cycle : is lending by state banks less procyclical?," Policy Research Working Paper Series 6110, The World Bank.
  3. Cull, Robert & Peria, Maria Soledad Martinez, 2012. "Bank ownership and lending patterns during the 2008-2009 financial crisis : evidence from Latin America and Eastern Europe," Policy Research Working Paper Series 6195, The World Bank.
  4. Meghana Ayyagari & Asli Demirgüç-Kunt & Vojislav Maksimovic, 2010. "Formal versus Informal Finance: Evidence from China," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 23(8), pages 3048-3097, August.
  5. Swamy, Vighneswara, 2010. "Bank-based Financial Intermediation for Financial Inclusion and Inclusive Growth," MPRA Paper 47510, University Library of Munich, Germany.
  6. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2012. "Financing of firms in developing countries : lessons from research," Policy Research Working Paper Series 6036, The World Bank.
  7. Cihak, Martin & Demirguc-Kunt, Asli & Feyen, Erik & Levine, Ross, 2012. "Benchmarking financial systems around the world," Policy Research Working Paper Series 6175, The World Bank.
  8. Laura Alfaro & Anusha Chari, 2009. "India Transformed? Insights from the Firm Level 1988-2005," Harvard Business School Working Papers, Harvard Business School 10-030, Harvard Business School.
  9. Gur, Nurullah, 2012. "Government ownership of banks, job creation opportunities and employment growth," Economics Letters, Elsevier, Elsevier, vol. 117(2), pages 509-512.
  10. Cole, Shawn & Kanz, Martin & Klapper, Leora, 2012. "Incentivizing calculated risk-taking :evidence from an experiment with commercial bank loan officers," Policy Research Working Paper Series 6146, The World Bank.
  11. Shawn Cole, 2009. "Fixing Market Failures or Fixing Elections? Agricultural Credit in India," American Economic Journal: Applied Economics, American Economic Association, American Economic Association, vol. 1(1), pages 219-50, January.
  12. Maria Bas & Antoine Berthou, 2012. "The Unequal Effects of Financial Development on Firms' Growth in India," Working Papers 2012-22, CEPII research center.
  13. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2014. "Does local financial development matter for firm lifecycle in India ?," Policy Research Working Paper Series 7008, The World Bank.
  14. Cihak, Martin & Demirguc-Kunt, Asli, 2013. "Rethinking the state's role in finance," Policy Research Working Paper Series 6400, The World Bank.
  15. Kunal Sen, . "Towards Inclusive Financial Development for Achieving the MDGs in Asia and the Pacific," MPDD Working Paper Series WP/10/07, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).

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