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Bank branch density and economic development

Summary:
An important component in the development of an economy is for the population to be “banked”—that is, to have a bank account to save money and participate in the payment system. One indicator of the amount of banked people in a location (e.g., a state or country) used to be the number of bank branches in that location. The FRED graph above shows this statistic for a non-random set of countries: Mongolia, the United States, and Nigeria. If this statistic is in some way representative of economic development, why is the number of bank branches in Mongolia so much higher than in the United States? And why are the numbers for the United States and Nigeria declining despite continuous economic growth? The issue is that the banking industry has changed quite a bit: With automated teller

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An important component in the development of an economy is for the population to be “banked”—that is, to have a bank account to save money and participate in the payment system. One indicator of the amount of banked people in a location (e.g., a state or country) used to be the number of bank branches in that location. The FRED graph above shows this statistic for a non-random set of countries: Mongolia, the United States, and Nigeria.

If this statistic is in some way representative of economic development, why is the number of bank branches in Mongolia so much higher than in the United States? And why are the numbers for the United States and Nigeria declining despite continuous economic growth?

The issue is that the banking industry has changed quite a bit: With automated teller machines (ATMs) and then online banking, the need for physical bank branches has been considerably reduced. This explains the decline in the United States. Furthermore, the level of banking competition, the geographic distribution of the population, and other factors can also influence these numbers and make cross-country comparisons difficult. Thus, some conjunction of special circumstances has caused Mongolia to have the second-highest concentration of bank branches in the world, just behind Luxembourg.

Finally, why is this statistic not growing in Nigeria? The continent of Africa has its challenges, especially in rural areas. However, cell phones have become an unexpected source of financial development, not only through “traditional” mobile banking, but also by using phone minutes as currency for online transactions. This reduces the need for physical bank branches.

How this graph was created: Search for “Mongolia bank branches” and click on the result. Open the graph, click on “Edit Graph,” open the “Add Line” tab, and search for “United States bank branches.” Repeat for Nigeria.

Suggested by Christian Zimmermann.

About FRED Blog
FRED Blog
The Federal Reserve Bank of St. Louis is the center of the Eighth District of the Federal Reserve System. This District includes Arkansas, eastern Missouri, southern Illinois and Indiana, western Kentucky and Tennessee, and northern Mississippi.

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