The Social Impact of the Banking Sector in Colombia, 1995 – 2002

This document studies the impact of the banking sector on social variables in Colombia, and tries to identify how the difference in banking institutions’ development at the municipal levels influences economic and social prosperity of low income households and firms. One part of the literature emphasizes the role of the financial system in promoting this type of agents’ economic performance as long as it attracts them to the use of financial intermediation, making available to them the use of financial services and technologies, both in deposits and credit. Another trend in the literature studies specific characteristics of liquidity constrained agents. This study empirically identifies how bancarization influences poverty and investment on education, in the case of families; and economic performance and the number of firms, in the municipal level in Colombia for the period 1995-2002. When studying these effects we control for local variables such as public spending in investment, homicide rate and guerrilla conflict. The period of study was characterized by the end of an economic boom and recession, which influences our econometric results. This study shows that banking developments affect households’ education decisions and firms’ performance at the municipal level; it was also found that non performing loans are associated with the decrease in the number of firms, but a relationship between loans and the creation of firms was not present.