Banking system regulations, financial development and economic outcomes

A significant fraction of households in developing countries have limited access to basic financial services, which hinders their ability to borrow to invest in productive enterprises that can increase income and reduce poverty. Although microfinance institutions have helped these households meet some of their basic financial needs in recent years, they Jack the resources to perform effectively the functions of financial intermediaries. Using data from India's 1969-1989 banking system regulations, this dissertation investigates whether a government-led opening of bank branches in underserved areas could ease financial constraints, increase investment in productive assets and improve welfare. I present empirical evidence of the effects of these local branches in three sections.;The first section examines the relationship between opening bank branches in underserved areas and household ability to borrow. The main results of the econometric specification show that increases in bank access through regulations positively affected households' ability to borrow. Section two examines the effects of opening bank branches in underserved areas on school participation and educational attainment. The results show that opening bank branches in underserved areas positively affected school participation and educational attainment. However, in rural areas where the cost of schooling is usually high, the effect on educational attainment was negative and significant. Section three evaluates the effects of opening bank branches in underserved areas on consumption, asset accumulation and employment outcomes. The results show that financial development resulting from bank system regulations had positive effects on household consumption and asset accumulation.;These results suggest that improving financial access can help reduce financial constraints, increase investment in productive assets and decrease extreme poverty in developing countries; however, in rural areas, the most effective approach may be to consider a mix of policies that ease financial constraints for households while at the same time providing them positive incentives to invest in education for their children.