Political Institutions, Political Pressure and State-Owned Bankss Lending and Performance: Evidence from Developing Countries

Abstract

The theory of political benefits argues that politicians use state-owned banks for political purposes such as obtaining and maintaining political support. While the theory of social welfare goal argues that state-owned banks exist to counter market failures and finance socially important projects. This paper is a contribution to the theory of political benefits of state-owned banks. Using an international sample of 185 state-owned banks from 51 developing countries over the period 1998-2012, we report two main findings. First, we find significant political pressure on state-owned banks; that is, state-owned banks lend more and earn less in election years in developing countries. Second, we find that political pressure is more prevalent in weak political institutions developing countries but not in strong political institutions countries. Strong political institutions in the form of higher constraints on a policy change by anyone fraction of the government and higher democratic accountability are helpful in eliminating political pressure on state-owned banks in developing countries.