In this paper, we analyse the impact of credits provided by banks on provincial growth in Turkey, where state-owned banks have an implicit role of reducing disparity by allocating loans in underdeveloped regions that are ignored by private banks. We find a paradoxical effect of state-owned banks on regional development: their credits contribute significantly to the growth of more developed provinces, whereas they fail to encourage the well-being of less developed provinces. On the other hand, credits provided by private banks, in general, positively impact the per capita real gross domestic product (GDP) in both developed and less developed provinces. Contrary to their purpose of existence, our results suggest that state-owned banks did not reduce economic disparity among Turkish provinces. In the trade-off between growth and income disparity, our results suggest that state-owned banks should improve their lending behaviour, especially in the less-developed regions, in order to broaden their development role to the whole economy.

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