It is the year 234435 AD in Gamaku, a nation of about 30 million people. Poverty’s grey, threadbare cloaksweeps the entire nation. You can see it on the emaciated arms of the farmers in the fields, on the dilapidatedurban slums and on a million illiterate adults. Udundu, a Member of Parliament takes it all in, in the back seat ofhis vehicle; he is minutes away from the Parliament House. Today he will push for the new Banking Bill to bepassed. Mr. Speaker, Honourable members of the House, I will cut to the chase. We have before us a tool forpoverty alleviation ad economic development, not a mere jumble of legal words on paper. I cannotoveremphasize the role banks play in poverty reduction and economic development. As lawmakers it is ourmandate to pass laws that lead to progress and before this august house is one such bill, and in my address I willexplain how banking regulatory law can reduce poverty and support economic development. There are keyterms that must be explained; namely banks, poverty and economic development.The term bank is difficult to define because of rapid changes in the nature of banking business over the years,thus the concept of a bank will encompass a wide range of meanings : traditional deposit taking and lendinginstitutions to informal, flexible modern institutions such as microfinance institutions. Fundamentally, it is abody corporate issued with a licence in accordance with the law to conduct general banking business. Thisbusiness includes, credit cards services, paying bills for depositors, consumer loans, mortgages, life insurance,financial consulting, management of investment funds, asset management inter alia.Poverty is a multifaceted social and economic indicator. In one breath, to be poor means to be entirely or mostlacking in a source of collateral 1 and thereby, being unable to obtain loans. This further translates into theinability to start a business or educate one’s children or being trapped in wage employment or subsistencefarming inter alia. It is a situation where a population or section of a population is at most able to meet only itsbare subsistence essentials of food, clothing and shelter to maintain minimum levels of living.Economic development has been explained in four classic theories: the linear-stages- of growth model, theoriesand patterns of structural change, the international-dependence revolution and the neo-classical, free-marketcounterrevolution by economists such as Walt. W. Rostow, W. Arthur Lewis, Hollis B. Chenery, Theotonio DosSantos, Lord Peter Bauer among others. However, traditionally it means the capacity of a national economy,whose initial economic condition has been more or less static for a long time, to generate and sustain an annualincrease in its gross national income at rates of 5% to 7% or more. Alternatively, it is the ability of a nation toexpand its output at a rate faster than the growth rate of its population. 2 Dudley Seers explains the concept insimple terms: The questions to ask about a country’s development are therefore: What has been happening topoverty? What has been happening to unemployment? What has been happening to inequality? If all three ofthese have declined from high levels, then beyond doubt this has been a period of development for the countryconcerned. If one or two of these central problems have been growing worse, especially if all three have, itwould be strange to call the result “development” even if per capita income doubled.” 3LOWERING THE PARTICIPATION FEE: In understanding how banking regulatory law can reducepoverty and support economic development, it is important to grasp the relationship between poverty and thebanking system. Greenwood and Jovanovic’s study (1990) is instructive. In their work, they formulate a systemwhere financial intercessors evaluate incomplete data and move funds from savers to borrowers. Their systemmentions a participation cost, a lump-sum fee that agents must pay to participate in the financial sector. Thepoor being unable to afford this fee are unable to take advantage of opportunities in the financial system.Further, the fee widens the gap between low and high income agents. This gap in income distribution connotes adecline in economic development. In view of this, laws regulating banking business must be passed that will1 Todaro P. Michael, Smith C. Stephen, Economic Development, 10 th edition2 ibid3 Dudley Seers, ‘The meaning of development’, paper presented at the Eleventh World Conference of the Societyfor International Development, New Delhi (1969), p.3N O 17/02NO2208P2lower the participation fee. This will enable the average citizen, a fortiori the poor citizen to obtain credit fromthe bank, invest and escape poverty.MAKING LICENSING OF BANKS EASIER: Alternatively, banks instead of being viewed as intermediariesbetween savers and borrowers may be viewed as credit creators. Thus laws governing credit creation must be ofutmost priority. The obstacles in the banking system that reinforce poverty and stifle economic developmentmust be hurled away, not only by the passing of, but also the enforcement of banking laws. The obstaclesinclude stringent procedures for obtaining banking licenses, usuriously collaterized loans and astronomicallyhigh interest rates on loans. Laws should be passed that cap requirements by banking regulators for bankinglicences at a level that would encourage the widespread establishment of banks nationwide, especially to ruralareas. This would enable more individuals set up banks. Giving more individuals the opportunity to set up banksis of the essence in realising poverty reduction and economic development and it is lucidly stated by Yunus “Idecided to set up my own bank. The government thought it was a funny idea; poor people cannot borrowmoney… Grameen is a mechanism for integrating people back into the marketplace. It opens up opportunitiesso that you can build your own life “-Muhammad Yunus, founder of the Grameen Bank and 2006 Nobellaureate for peace. Job and income creation, employment, increased credit creation and wider access tofinancial services nationwide will result when individuals are able, because of the banking legislation that makesit relatively and reasonably easy to obtain banking licences. Succinctly, procedural laws should be passed andenforced on the grant of banking licenses to prevent long, expensive and complex processes in acquiringsuch licenses.Apart from individuals obtaining licences, banking legislation concerning licence requirements, passed andenforced will enable microfinance institutions to contribute their quota in poverty reduction and economicdevelopment. This could occur in the following manner: The Micro Finance Institutions (MFIs) that stem fromnon-governmental institutions (NGOs) often do not have a banking license and are thus not allowed to providethe whole range of financial services. When the businesses of their clients expand, their needs in financialservices change. The limited service package of MFIs in many cases is not sufficient to satisfy these needs.When there are no financial institutions available to offer the necessary range of financial services, thedevelopment of the Small and Medium Scale Enterprises (SME) sector is stifled, thus hampering vital economicdevelopment. In this scenario, the SME sector is left stranded, precisely when it is most needed for economicdevelopment, and for employment generation. Moreover, the MFIs may lose their best clients, putting thecontinuity of the institution at stake. 4 To obviate such an unfortunate situation, banking law should be enactedthat allows ‘banking licence holidays’ to ensure continuity of such institutions. This would operate the sameway as tax holidays do. These laws could provide that for example five years, a banking institution will beallowed to operate without the standard licence, but under a special licence because of their commitment to lendto target groups such as farmers and micro-entrepreneurs. This will be an incentive for banks to invest and lendto such groups that they hitherto would not have lent to. In developing countries the small and medium scaleenterprises obtain credit for capital to continue operations from microfinance institutions. Therefore, stringentlicensing requirements that prevent the establishment and expansion of these institutions spell doom for povertyreduction and economic development. Poor people in developing countries often make their living as micro-entrepreneurs, such as farmers, street vendors, craftsmen, taxi-drivers or home-workers in the informaleconomy. On average, informal activities in these countries contribute nearly half of the gross domestic product(GDP), while SMEs, which provide the bulk of employment in the formal economy, contribute 17% to GDP(World Bank, 2005). Micro-enterprises and SMEs are, both in low- and high-income countries, the backbone ofthe economy and the engine for growth. 5 Palpably, banking law that allows banking licence holidays asdescribed supra will reduce poverty and support economic development.PARADIGM SHIFT FROM COLLATERAL AS A REQUIREMENT FOR LOANS: The extent to whicha given rate of economic growth affects poverty levels is influenced by the institutional structure and policyenvironment that exists in particular countries. As Goudie and Ladd (1999), p. 191 note, ‘some patterns of4 Access to financial services in developing countries, The Rabobank View5 The Rabobank View, ibidN O 17/02NO2208P3growth are more effective than others in reducing poverty, and should be actively fostered. There will begrowth patterns that have greater participation of the poor, allowing them to benefit from the growth of thenational economy. Hence, for maximum impact on poverty, pro-poor patterns of growth should be promoted’.Pro-poor growth builds on productive use of the assets of the poor and improved access to markets. Publicpolicies which reduce market imperfections and thereby widen access and enhance the productive endowmentsand capabilities which poor people need to take advantage of opportunities in a growing market economy willbe key factors in promoting pro-poor growth. 6Therefore, banking legislation that ensures that banks lend to the poor without collateral is crucial. Thistakes cognisance of the fact that the poor usually have very limited or no assets at all. The lack of assets shouldnot prevent the participation of the poor in economic development through entrepreneurship. For uncollaterizedloans, the Grameen Bank of Bangladesh model is instructive. Borrowers in groups of five go through two weeksessions of training before they can secure a loan. Then there are weekly group meetings with a bank officer.Thus instead of assets as collateral, “peer pressure” is relied on as collateral. Strong, social pressure is placed onmembers to repay. Additionally, individual borrowers can increase the amount they can borrow each year by10% upon timely repayment of the loan. Ultimately, if there is perfect attendance at group meetings by membersand total repayment of loans, each borrower can increase the amount they can borrow by an another 5%.Consequently, the repayment rate is high because of the incentive of higher borrowing capacity upon timelyrepayment.Access to financial services is the backbone of rural and economic development. Without a well-functioningfinancial system, neither aid nor local entrepreneurship can create the right conditions for long-term economicgrowth. A financial system that can provide the full package of financial services to the poor will result in amore stable income flow and enable them to be better equipped for adversities. In ideal situations, providingfinancial services to micro-entrepreneurs will enable them to expand their businesses and create employmentwhich ultimately results in a strong reduction of poverty, and this contributes to economic development. 7Therefore, general laws ensuring that the poor have access to financial services are of the essence. Forinstance, legislation compelling insurance companies to provide services to the poor at subsidized rates ofpremium will protect the poor against income shocks. Further, laws that strengthen already existingnational insurance commissions will ensure that the companies stay solvent, because of the supervisoryand regulatory measures that will be imposed by such commissions on the industry. Such commissionsshould be independent and autonomous to prevent evasion of the regulations put in place through lobbying byinsurance companies as well as to prevent political influence.NON-DISCRIMINATORY APPROACH TO CREDIT ALLOCATION: Banking regulatory law thatcompels banks to lend to individuals in agriculture and other risky sectors would dispel the discriminatoryapproach to financing by banks. In developing countries, especially commercial banks, usually do not servemicro- and small enterprises because of the perceived high cost of small transactions, lack of traditionalcollateral, lack of basic requirements for financing and geographic isolation. These enterprises therefore rely ontheir own savings capacities, relatives and friends. Otherwise, they must rely on the flexible but exorbitant termsoffered by moneylenders and traders. In yet other cases they seek out local credit unions, co-operatives or non-profit organisations providing limited financial services. 8 Thus, banking legislation that penalises banks thatglaringly refuse to lend to farmers would ensure that farmers escape poverty because of access to capitalto move from subsistence into commercial farming, more savings and income and ultimately economicdevelopment.The crux of alleviating poverty and supporting economic development lies in the poor having access to credit.When legislation is passed that compels banks to lend to peasant farmers, street hawkers, labourers interalia, it will ensure that the poor who would otherwise be deprived of credit, gain access to it. The Grameen6 The Pakistan Development Review 39 : 4 Part I (Winter 2000) pp. 363–388,Financial Development, EconomicGrowth, and Poverty Reduction Colin Kirkpatrick7 Op. Cit, The Rabobank View8 ibidN O 17/02NO2208P4Bank of Bangladesh is a shining example; it demonstrates how banks can reduce poverty and support economicdevelopment. The bank operates in about 78,000 villages, with branches and five member solidarity groups.Thus loans are awarded to the groups and the category of borrowers is usually those who own less than half anacre. The key is the use of unconventional methods of risk reduction: forming groups of borrowers that arejointly responsible for each other’s loans (joint liability) and intense monitoring of clients, relying heavily on thepromise of repeating the loan.Besides the Grameen Bank in Bangladesh which is well known, BancoSol in Bolivia, Bank for Agriculture andAgricultural Cooperatives (BAAC) in Thailand, Bank Rakyat Indonesia (BRI) and the National Micro-financeBank (NMB) in Tanzania are all successful examples of efficient micro-credit. They all show the important rolemicro-credit institutions in developing countries can play in fostering rural development and how more effectivemarket based institutions can be with respect to direct government interventions for directing credit to specificmarkets at regulated low interest rates. Important conditions for success include “independence of decision-making and a high level of accountability for financial performance” 9It is humbly suggested that national legislation compelling the establishment of rural banks such as theGrameen Bank in every region or state in developing countries should be enacted. This will connote wideraccess to credit of the poor and consequent improvements in the businesses of same. For instance, a peasantfarmer with access to credit could improve his status when he purchases a plough, or harvester and divert intocommercial farming, a street hawker with the ability to amass a wider variety and quantity of goods because ofaccess to credit, could escape the instability of being a petty trader and transform into an established vendor.CONCLUSION: The most important rationale for regulation in banking is to address concerns over the safetyand stability of financial institutions, the financial sector as a whole, or the payments system. 10 “The bankingsystem as a whole is a ‘public good’ that benefits the nation over and above the profits that it earns for thebanks’ shareholders. Systemic risks to the banking system are risks for the nation as a whole. Although themanagement and shareholders of individual institutions are, of course, eager to protect the solvency of their owninstitutions, they do not adequately take into account the adverse effects to the nation of systemic failure. Banksleft to themselves will accept more risk than is optimal from a systemic point of view. That is the basic case forgovernment regulation of banking activity and the establishment of capital requirements”. 11 It is important tonote that the world is not a Shangri-la and the proposed ways banking law can reduce poverty and supporteconomic are not fool-proof. Market failures may occur, insurance companies may become insolvent andborrowers may default in repayment of their loans. In implementation therefore, caution must not be thrown tothe winds. Consequently, banking laws in the pursuit of the ends of poverty reduction and economicdevelopment should establish a balance between those ends and stability in the system resulting fromoptimal risk. This implies on one hand, a legal environment where the taking possession of collateral ispossible without delay, where financial institutions can reduce their risk by joint liability lending. However , onthe other hand, it implies a legal environment where banking licensing procedure is not unduly stringent, theexistence of bank licensing holidays, reminiscent of the concept of tax holidays, the enforcement of laws thatensure moderately, subsidized interest rates to the poor, a paradigm shift from assets as collateral to social peerpressure for lending decisions by banks in rural areas, reminiscent of the Grameen model and ultimately lawsthat ensure full access to the entire spectrum of financial services, precisely insurance, collateral, mortgages andfinancial advice and ultimately, credit.In the final analysis, the banking legislation proposed to be enacted should ensure that the principal functions ofbanks, in their various forms from traditional ones to microcredit ones are effectively carried out to the ultimateends of poverty reduction and economic development. These functions include efficient credit allocation andmatching savers to investors. Banking regulatory law reduces poverty and supports economic growth when it9 World Bank (2003)10 Bonn, June 2005, An Increasing role for competition in the regulation of banks11 Feldstein (1991)N O 17/02NO2208P5strengthens creditor rights, promotes contract enforcement and ensures access to an entire package of financialservices such that the poor retain their entrepreneurial ability.REFERENCES1. Todaro P. Michael, Smith C. Stephen, Economic Development, 10 th edition,20092. Dudley Seers, The meaning of development’, paper presented at the Eleventh World Conference of theSociety for International Development, New Delhi (1969)3. Access to financial services in developing countries, The Rabobank View4. KirkPatrick Colin ,The Pakistan Development Review 39 : 4 Part I (Winter 2000) pp.363–388,Financial Development, Economic Growth, and Poverty Reduction,5. Bonn, June 2005, An Increasing role for competition in the regulation of banks6. Feldstein, Martin, ;The Risk of Economic Crisis: Introduction; in Feldstein, Martin, ed., The Risk ofEconomic Crisis, Chicago, 19917. Greenwood J., Jovanovic B.,1990, Financial development, growth and the distribution of income, J.Polit. Econ.98, 1076-11078. Goudie, A., and P. Ladd (1999) Economic Growth, Poverty and Inequality. Journal of InternationalDevelopment 11: 177–195.9. World Bank, Rural and Financial Services, Washington, D.C., 200310. World Bank (2005): “World Development Indicators 2005”, IBRD/World Bank.