Comparing financial returns: National development banks vs commercial banks

Despite the potential of national development banks (NDBs) to address market failures, concerns remain that they may engage in unfair competition with commercial banks by offering favorable financing terms to commercially viable—and possibly politically connected—firms. We manually collect data on the financial returns of a large sample of NDBs worldwide to test whether NDBs engage in unfair competition with commercial banks resulting in excessively high financial returns, whether NDBs finance development projects resulting in modestly lower financial returns than those commercial banks, or whether they instead suffer from undue political intervention leading to much lower or even negative returns. We examine return on assets, return on equity, and net interest margins, controlling for bank characteristics, macroeconomic conditions, and extensive fixed effects. We find that NDBs consistently earn lower financial returns than commercial banks, including state-owned, private, and foreign-owned institutions, with the largest gap observed in net interest margins. These patterns are robust to alternative specifications, formal tests for omitted variable bias, and different sample constructions. Further evidence shows that NDB profitability declines during election years and with greater state ownership, suggesting heightened exposure to political interference. In summary, the empirical evidence challenges the conventional perception that NDBs engage in unfair competition with commercial banks which would end up with superior profitability. Our study makes the policy recommendation that it is important for NDBs to build the firewall against potential undue political interference to ensure their financial viability.