Should the Government be in the Banking Business? The Role of State-Owned and Development Banks

This paper explores the literature and theories behind the role of state-owned banks. The paper shows that state-owned banks in developing countries are characterized by lower returns than privately operated banks, which create fiscal costs. However, this should not be used as an argument against state-owned banks in developing economies. The authors argue state-owned banks have a place in developing economies because they may engage in lending to projects with low profitability but high social value. While no evidence was found that the presence of state-owned banks encourages economic growth and financial development, the evidence against the presence of state-owned banks is not as strong as previously claimed.