Does Greater Public Ownership in the Financial System Promote Superior Performance?

Abstract

This paper examines whether greater prevalence of government-owned banks leads to qualitatively different outcomes. By reviewing the extensive literature on government-owned banks, the paper determines whether greater government participation in the financial system leads to greater financial stability and greater provision of finance for welfare generating activities. The evidence in literature suggests that the effects of government participation in the financial system are complex and context-dependent. This paper finds that while government banks not only provide finance that privately owned banks fail to provide and finance long-term projects that contribute to the capital development of an economy, they are also a stabilizing counter-cyclical influence in the economy. However, there is evidence to show that in several instances, government-owned banks have been used by politicians for the achievement of political goals. The paper also identifies gaps in the literature on government-owned banks, and avenues for future research.

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