Journal of Financial Services Research

, Volume 25, Issue 2, pp 169-202

Further Evidence on the Link between Finance and Growth: An International Analysis of Community Banking and Economic Performance

  • Allen N. BergerAffiliated withBoard of Governors of the Federal Reserve System and Wharton Financial Institutions Center
  • , Iftekhar HasanAffiliated withRensselaer Polytechnic Institute and Bank of Finland
  • , Leora F. KlapperAffiliated with

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We try to contribute to both the finance-growth literature and the community banking literature by testing the effects of the relative health of community banks on economic growth, and investigating potential transmission mechanisms for these effects using data from 1993 to 2000 on 49 nations. Data from both developed and developing nations suggest that greater market shares and efficiency ranks of small, private, domestically owned banks are associated with better economic performance, and that the marginal benefits of higher shares are greater when these banks are more efficient. Only mixed support is found for hypothesized transmission mechanisms through improved financing for small and medium enterprises or greater overall bank credit flows. Data from developing nations are also consistent with favorable economic effects of foreign-owned banks, but unfavorable effects from state-owned banks.

Banks community banking SMEs financial development economic growth international.