Abstract:

Social programs constitute a significant share of GDP in many developing countries. Yet how the distribution of these funds through commercial banks versus government-owned channels, such as social banks—institutions prioritizing social objectives over profits—, affects financial inclusion, banking competition, and the credit supply remains unclear. This paper examines whether the expansion of a credit-less social bank, assigned to managing social-program funds and providing fee-free basic deposit accounts and transaction services, displaces commercial banks and constrains the credit supply by shifting deposits away from credit-producing institutions. Using an event study design exploiting the staggered rollout of nearly 2,750 branches across Mexican municipalities, we find that the social bank’s entry significantly increases the availability of physical infrastructure, driving a persistent rise in debit card adoption. However, within a year of entry, commercial banks are deterred from maintaining and expanding branch networks, resulting in a reduction in their presence and suggesting a crowding-out effect. Additionally, shifting social-program deposits away from commercial banks reduces lending to firms and tightens credit conditions, as evidenced by a difference-in-differences analysis using microdata from the credit registry. A static structural entry model shows that the deposit-focused entrant raises commercial banks’ entry thresholds by lowering per capita variable profits and increasing fixed costs, ultimately reducing their presence.

For further information please contact: giulia.zenoni@unibocconi.it