Their results too indicate that bank expansion has significant positive effects on poverty, and that this effect can be attributed to greater saving and borrowing in banks by poor households in previously unbanked areas.

There is growing evidence, however, that in addition to income and the cost of bank services, other household attributes such as wealth and education are strongly correlated with their participation in the formal financial sector. Given income, households which do not save or borrow using banks tend to be less educated, and to belong to marginalized groups.

For example, in their study of household finance in a Hispanic neighborhood of Chicago, Bond and Townsend (1996) find that households with higher income, greater English proficiency, house ownership, and use of services outside the neighborhood all make more use of banks and less use of loans from friends. Caskey et al. (2006) find that 60% of the unbanked in Mexico belong to a “marginalized” group, since they work in the informal sector, while 90% of the unbanked in the US belong to an immigrant or minority group. The comparisons presented in their paper show that besides their poverty, unbanked households in the US and Mexico resemble each other in belonging to an educationally, economically or socially disadvantaged group. Similarly, Pande et al. (2005) find that only 33% of laborers in rural India had loans in an average year between 1983-1999, only 23% of which came from formal institutions, and that even within this marginalized group, borrowing rates were the lowest among the landless and illiterate. Al-Hussainy et al. (2008) use household survey data from 12 countries to show that having a bank account is correlated with not only income but also attributes like literacy and home ownership.

Recent findings from the US (Washington (2004), Caskey (1997)) too support the view that income or supply-side factors such as bank branch penetration cannot by themselves explain low bank use among the poor and marginalized. Washington (2004) finds that “lifeline” US banking legislation requiring banks to offer low-cost accounts is associated with a small, lagged increase in the number of minority low-income households with a bank account, but seems to have had little impact on the _average_ lowincome household. Using a survey of lower-income urban households in the US, Caskey (1997) reports that while 54% of the households did indeed list high bank fees or the inconvenience of bank locations as reasons for not having deposit accounts, 53% said they had no accounts because they had no savings, 21% because they wanted to keep financial record private, and 17% because they were not comfortable dealing with banks. The link between education and participation in the financial sector is a growing area of research, with early results indicating a causal connection between increases in financial knowledge and financial behavior (Martin (2007)).

Our paper contributes to this literature by looking at the differences between households with and without formal savings accounts, using household level data which is rich in financial information. This data set was collected through a survey conducted in 2005 by BANSEFI, a Mexican development bank, and covers nearly 5000 households from all parts of the country. A unique feature of the survey design allows us to match banked and unbanked households residing in close proximity to each other, a matching which lets us compare households that face similar costs and benefits of formal savings accounts because of residing in the same neighborhood. In other words, we can take out the supply-side variation in savings instruments, including that in the interest rates being