Ethnicity, Banking and Local Economic Development: Evidence from Ethiopia

A unique dataset is used to uncover one mechanism generating regional and ethnic inequality in Ethiopia. Individual banks’ location decisions depend on the degree of similarity between the ethnic composition of each locality and the ethnic composition of the bank’s board of directors. Using ethnic similarity as an instrument for bank location and climate as an instrument for economic development, we model both local banking provision and local economic development. Our model predicts that if the ethnic composition of all boards reflected the national population, then banks would have an incentive to operate in a wider range of locations.