This paper studies the role of different types of credit institutions in income inequality. By analyzing Italian local (provincial) credit markets over the 2001–2011 period, we find that cooperative banks mitigate income inequality in local communities more than their commercial counterparts. The results also suggest that it is the specific nature and orientation of cooperative banks, more than their relationship lending technologies, that improve income distribution. The impact of cooperative banking on inequality appears however to be partly channeled by a reduced dynamism of local economies, especially lower migratory flows and business turnover. (JEL G21, G38, O15)