VoxEU Column Development Financial Regulation and Banking

The real effects of banking the poor: Evidence from Brazil

Access to finance is a crucial component of economic development. This column studies the effects of Brazil’s ‘Banks for All’ programme, which targeted underbanked cities not served by government-owned banks. It finds a strong positive effect of the policy on the number of bank branches and on the overall amount of credit and deposits, particularly for cities located in banking ‘deserts’. Additionally, treated cities experienced increases in the number of firms, higher demand for labour, and higher wages, confirming the link between financial and economic development.

Financial underdevelopment has long been identified as a crucial impediment to economic development, both because it reduces the level of aggregate investment and employment (see Fonseca and Van Doornik 2021 for recent evidence) and because it distorts the allocation of capital across firms and talented entrepreneurs (e.g. Hsieh and Klenow 2009, Buera et al. 2011, Bau and Matray 2020a, 2020b). As a result, many developed and developing countries have implemented policies to promote access to finance in lagging regions over the past 40 years. Such policies are important in practice; the World Bank estimates that about 1.7 billion people, the majority of whom are in poor countries, lack access to financial services (World Bank 2017).

The Brazilian experiment: The ‘Banks for All’ programme (‘Banco para Todos’)

In a recent paper (Fonseca and Matray 2021), we study an unusual policy experiment to provide novel evidence linking financial development with economic development. In 2004, the Brazilian federal government launched the ‘Banks for All’ programme, which explicitly targeted underbanked cities that were not served by government-owned banks. This policy affected financial development on both the extensive and intensive margins. It promoted financial inclusion by causing a large expansion in the density of bank branches and led to financial deepening by expanding the overall amount of credit. This offers us a unique natural experiment with a large, exogenous shock to financial access and capital deepening at the level of whole labour markets.

Our empirical analysis combines Brazilian administrative matched employer-employee data over 2000–2014, covering the universe of formal employees in Brazil, with detailed bank branch balance sheets and income statements. We trace how the 2004 policy affected the reallocation of capital and labour and provide causal evidence on the different margins through which financial development promotes economic development. 

The programme is particularly appealing because its impact on treated cities is important enough to generate quantitatively large infusions of credit across a vast number of local labour markets. Combined with the fact that treated cities have limited economic integration due the extreme spatial dispersion of cities in Brazil produced by the country's size, we can plausibly treat cities like a collection of small independent economies and interpret our estimates as ‘local general equilibrium effects’.

A successful financial development policy

The reform had a large effect on the financial development of treated cities both on the extensive and intensive margins. The number of bank branches, the overall amount of credit, and total deposits all increased substantially after 2004 and did not mean revert in the long run. Consistent with this development being driven by the ‘Banks for All’ programme, we find that all of the increase comes from the expansion of government-owned banks. By contrast, the number of branches and credit from private banks stayed constant. The lack of crowding-out of private banks by government banks explains why the overall number of banks and credit increased.

We report the effect of the reform in Figure 1, and plot the evolution of the probability of having a bank branch (left) and of having a public or private bank branch (right) in treated cities relative to control cities. Two facts are noteworthy. First, the probability of having a bank branch in treated and control cities evolved in close parallel prior to the reform. This is particularly reassuring given the large credit boom that Brazil experienced during this period and validates our design, as both treated and control cities were on the same private credit trend prior to the reform.

Second, the expansion of public banks only minimally crowded out private banks. Instead, it came in addition to the number of private branches and volume of credit from private banks, resulting in a large increase in overall financial development for treated cities. The number of bank branches and the amount of credit increased sharply after 2004, and continued to increase progressively throughout the period, with no mean reversion post reform. In this respect, the policy can be interpreted as a change in the steady state of local financial development, rather than a one-time infusion of capital.

Figure 1 The effects of the programme on having a bank branch

Panel A) Any branch


Panel B) Public versus private banks


The promotion of economic development 

We find that the policy led to an economically meaningful increase in economic development. Following the reform, treated cities experienced an increase in the number of firms by 9.8%, while the size of establishments existing prior to the reform increased by 10.1%. This expansion in the number of firms and in the size of existing firms translated into an increase in the demand for labour, with the number of employees rising by 10%, and higher wages, which increased on average by 4.7%.

In Figure 2, we plot the evolution of the number of firms and the average wage in treated cities relative to control cities. 

Figure 2 Effects of the programme on the number of firms and the average wage

Panel A) Number of firms


Panel B) Average wage


Finally, we study how the reform affected industry dynamics. Consistent with models emphasising that economic development requires countries to diversify their industrial base and explore their comparative advantage (e.g. Hausmann and Rodrik 2003, Imbs and Wacziarg 2003), we find that financial development increases the number of industries and reduces the concentration of economic activity, implying that economic activity in a city becomes more diversified. 


The mechanisms through which financial development and financial inclusion foster economic development are still hotly debated. Two main theories provide microfoundations for why financial frictions impact business development. First, due to limited information, low collateral value, and a large informal sector, firms in developing countries primarily produce soft information and are dependent on a banking system that promotes lending relationships (e.g. Rajan and Zingales 2001, Hombert and Matray 2017, Duranton et al. 2016). In this case, the development of the financial sector will promote economic growth by reducing the cost for financial intermediaries to screen and monitor projects (e.g. Greenwood and Jovanovic 1990).

The second hypothesis is that limited financial development prevents productive but poor entrepreneurs from entering sectors with high fixed or set-up costs, as poor entrepreneurs would not be able to save enough to self-finance out of the poverty trap. This affects the number of firms, the total labour demand, and the allocation of talents in each industry (e.g. Buera et al. 2011). 

To tease out which hypothesis better explains our results, we compare the effect of the policy in treated cities that were in ‘banking deserts’ (i.e. with no bank in the close surrounding of the city), assuming that monitoring costs are larger when banks are farther away. We do a similar exercise comparing industries within cities, and proxy for the presence of high fixed costs with the median establishment size in each industry.

Our results provide clear support for the importance of monitoring costs and reject an explanation based on large fixed costs. We find that the effect of the policy is concentrated in cities that are in banking deserts, while cities that are closer to other cities with bank presence gain less. In contrast, when looking within cities and across industries, we find no evidence that industries that operate at larger scale grow faster after the reform. This last result suggests that financial inclusion (increased access to capital) might play a more important role than capital deepening at low levels of economic development. 

We also unearth important firm dynamics. Indeed, the change in the total number of firms vastly under-estimates the true dynamics, as the increase in the number of new entrants after the reform also triggered an increase in the number of firms that exited. This suggests that financial development promotes growth via a process of ‘creative destruction’.  


Bau, N and A Matray (2020a), “Misallocation and Capital Market Integration: Evidence from India”, NBER Working Paper No. 27955.

Bau, N and A Matray (2020b), “Capital market integration can reduce misallocation: Evidence from India”,, 16 March.

Buera, F, J Kaboski and Y Shin (2011), “Finance and Development: A Tale of Two Sectors”, American Economic Review 101(5): 1964–2002.

Duranton, G, E Ghani, A Grover Goswami and W Kerr (2016), “Land and financial misallocation in India”,, 27 May. 

Fonseca, J and B Van Doornik (2021), “Financial Development and Labor Market Outcomes: Evidence from Brazil”, Journal of Financial Economics (forthcoming).

Fonseca, J and A Matray (2021), “The Real Effects of Banking the Poor: Evidence from Brazil”, CEPR Discussion Paper 16798.

Greenwood, J and B Jovanovic (1990), “Financial Development, Growth, and the Distribution of Income”, Journal of Political Economy 98(5): 1076–1107.

Hausmann, R and D Rodrik (2003), “Economic Development as Self-Discovery”, Journal of Development Economics 72(2): 603–633.

Hsieh, C-T and P J Klenow (2009), “Misallocation and manufacturing TFP in China and India”, The Quarterly Journal of Economics 124(4): 1403-1448.

Imbs, J and R Wacziarg (2003), “Stages of Diversification”, American Economic Review 93(1): 63–86.

Hombert, J and A Matray (2017), “The Real Effects of Lending Relationships on Innovative Firms and Inventor Mobility”, Review of Financial Studies 30(7): 2413–2445.

Rajan, R and L Zingales (2001), “Financial Systems, Industrial Structure, and Growth”, Oxford Review of Economic Policy 17(4): 467–482.

World Bank (2017), “The Global Findex Database 2017”, World Bank.

1,155 Reads