This essay prima facie requires a scrutiny of how bankingregulatory law can reduce poverty and support economic development. However, thispaper probes into a number of aspects pertaining banking regulatory law, withfocus on how it can be used as an engine to foster economic development andreduce poverty especially in the developing countries of the world. Structurally,this paper first highlights the basic terms that form subject matter of theentire discussion; Banking regulatory law, Poverty reduction, and Economicdevelopment. Secondly, it examines the relationship between banking regulatorylaw, poverty and economic development, plus the effects therein, andfurthermore it portrays the role of banking regulatory law in economicdevelopment, how it can be used as a tool to foster economic development andrecommendations on its usage.
Finally is a conclusion. BANKINGREGULATORY LAW. The banking system as a whole isa `public good’ that benefits thenation over and above the profits that it earns for banks’ shareholders.Systemic risk to the banking system are risks to the nation as a whole.Although the management of individual institutions are of course eager toprotect the solvency of their own institutions, they do not adequately takeinto account the adverse effects to the nation of systemic failure. Banks leftto themselves will accept more risk than is optimal from a systemic point ofview. That’s the basic case for government regulation of banking activity1.
Thereis no explicitly compiled definition of banking regulatory law, however, aclose examination and understanding of what constitutes banking law and bankingregulation brings one to a conceptualization of what banking regulatory law is.Banking law is law that deals with the various transactions that arise asfinancial institutions go about serving their customers and growing theirbusiness2.Banking regulation is a form of government regulation which subjects banks tocertain requirements, restrictions and guidelines designed to create market transparencybetween banking institutions and the individuals, corporations with whom theyconduct business3.Impliedly, banking regulatory law is law governing banking institutions as theygo on with their day to day transactions with customers. It’s no doubt thatthese regulatory laws are engineered by the governments to achieve certainobjectives and overcome the adverse effects of bank failure.
Most nations accordinglyhave agencies in place that ensure compliance to the banking regulations. POVERTYREDUCTION. Poverty is defined as, the condition of beingindigent; the scarcity of the means of subsistence.
4 It’sa multifaceted concept which bears with it economic, social, and political elements.It’s so absurd that 59% of the world’s population lives on less than US $ 5 aday and are unable to meet basic needs5.This portrays that poverty is one of the biggest challenges in the world today.Poverty reduction can be termed as measures that can be taken to decrease thepoverty levels.ECONOMICDEVELOPMENT. This refers to the increase in the standard ofliving in a nation’s population with sustained growth from a simple low incomeeconomy to a modern high income economy6.Economic development is related to increase in output united with improvementin social and political welfare of people. Most times it is through policyintervention towards desired objective that nations can bring forth economicdevelopment.
THERELATIONSHIP BETWEEN BANKING REGULATORY LAW, POVERTY AND ECONOMIC DEVELOPMENT. Bank regulatory law is mainly concerned withfinancial institutions, whose services directly impact on poverty levels andeconomic development. The operation of the financial system can have a keyimpact on economic growth and the stability of the economy7. Thisrelationship between banking regulatory law and poverty reduction is twofold, andthus dependent on the policy environment of a particular nation. An inefficient financial system inevitably aggravatespoverty levels as it backstabs financial development, considering the fact thatmajority of the populace may find it difficult to access financial services. Inmost developing countries, it’s evident that various financial institutions donot serve the poor because of perceived high risks, low profitability in smalltransactions and inability to provide the physical collateral required8.This distances the poor from formal financial services provided mainly bybanks, it’s no surprise that about 33% of Ugandans keep their money at home orin secret places9.It is important to state thus that such exclusion is discriminatory and leavesmost of the poor with limited access to finance for development.
However, we cannot exclude financialdevelopment from the topic of economic development and poverty reduction. Withimproved access to micro financial services, the poor can actively participatein and benefit from development opportunities, since they can easily save,borrow loans to build assets, develop micro enterprises and enhance incomeearning capacity10.It has been noted that poverty will reduce when people are able to use multiplefinancial products such as savings to prepare for difficult times, borrow togrow businesses, be insured against man-made and natural disasters, easily andaffordably receive and make payments etc.11. It’stherefore upon the policy environment governing financial institutions that wederive the relationship between banking regulatory law and poverty reduction,economic development. The way these financial institutions are governeddirectly impacts on economic development, depending on the aspirations andobjectives of the regulatory authorities. Am certain that as long as the regulatory policies are suitable,favorable and efficient to enable banking institutions serve equally allclasses of people in society then a nation is on the right path to reducepoverty and develop economically.
A detailed discussion of this is enunciatedfurther below. BANKING REGULATORY LAW TO REDUCE POVERTY ANDSUPPORT ECONMIC GROWTH. To ensure growth anddevelopment with equity, financial sector policies are expected to be tuned tosub-serve these broad objectives12. Banking institutions provide financial,investment and economic advisory services, these in a way foster povertyreduction and economic growth because some lay business men are enlightened andmake right decisions and choices that ultimately profit them. It’s howeverabsurd that in a vast number of developing countries13,financial institutions that provide such vital services are concentrated inurban areas and limit their services to big stable commercial institutions andwell off individuals.
In so doing, they side line the poor who miss out onopportunities to access credit, save and develop financially. There is need forregulatory authorities to enact laws that coerce financial institutions to beimpartial and accommodative of the poor and under privileged in rural areas,thereby including them in financial development. The World Bank considersfinancial inclusion a key enabler to reduce poverty and boost sharedprosperity.
This move would ensure that banks are accessible by the poor andunder privileged for them to partake of many financial services like savings,loans, insurance inter alia that propel them to financial development. It’s inevidence that opening bank branches in rural unbanked areas of India was associatedwith poverty reduction in rural areas14.Financial inclusion of rural areas inevitably fosters rural household access tosaving and borrowing for investment which in a long run reduce poverty andensure economic development since even the poor/ under privileged are empoweredeconomically. Financialinstitutions also engage in a number of commercial activities, like investing,monetary transactions. This exposes them to a number of risks like credit riskdue to failure of debtors to meet obligations and market risks as a result ofchanges in market prices. The occurrence of such risks without measures tosafeguard against them is so detrimental not only to the banking institutionsbut also their customers who are bound to suffer loss due to delay inanticipated business transactions. This hinders and halts a number of businessactivities that are meant to grow banking institutions and also financiallydevelop their customers hence dragging economic development.
There is need forregulatory agencies to enact regulations that mandate financial institutions tohold certain minimum amounts of capital in reserve against unforeseeable risksthey are exposed to. The law should also focus on banks having robust frameworks for risk management. Such regulations save a lot from delay and wastageof time and also ensures consistency provision of commercial and financialservices irrespective of the unfavorable circumstances surrounding banks , thisinevitably enhance economic development and reduce poverty. Digitalfinance services allow delivery of financial services at a reduced cost topeople who remain unreachable through the traditional banking systems15.M-pesa, a mobile money transfer service in Kenya is a good example, it hasrevolutionized the country’s financial services landscape16 However even in the 21st centuryand age of technology, most financial institutions in some low income,developing countries have not yet adopted digital services to be able to reachout to most of their customers, this leaves lagging behind illiterate andignorant customers who miss out a lot of beneficial financial services. It’s inevidence that, digital financial services enhance financial inclusion which isso vital to poverty reduction. It is therefore necessary for regulators offinancial institutions enact laws that obligate and encourage bankinginstitutions to use technology and digital finance services to be able toefficiently reach out to their customers tied up in traditional banking systems. Lending to certain favored sectors of theeconomies in particular nations is very vital, not only because they are thebackbone of those economies, but also because majority of the populace deriveits livelihood from therein.
In Uganda, agriculture is the backbone of theeconomy but it’s disheartening that majority of the peasants who engage in anumber of agricultural activities cannot easily access credit /loans frombanking institutions, to build up and expand their farming activities, they areleft out either because they do not have adequate prerequisite collateral ordue to lack of will by banks to lend to them. This leaves them incapacitated toexpand, profit and develop financially at a faster pace. Such priority sectorsare inevitable from the economic development of any nation because they arecentral to the livelihood of most persons. There is necessity for governments to enactregulations that require financial institutions to direct credit to prioritysectors of their economies and favor them when it comes to lending. Such aregulation fosters the financial development of majority of the populace, aslong as they borrow, invest and build their assets.
Thereby having banking regulatory law reducepoverty amongst most people and enhance economic development. Banking institutions engage in business activities and make quite hugeprofits. Foreign banks normally repatriate profits back to their home countriesinstead of reinvesting in countries in which they operate. This leavescountries from which they operate benefit little in comparison to what theylose in terms of what these banks get from their citizens. Some countries havebeen so wise to curtail such mean activities by foreign banks, however majorityof the developing countries are still subject to such exploitation. Bankregulators should enact laws mandating foreign banking institutions anddomestic ones too, to reinvest in communities in which they operate as a way ofgiving back to such societies and developing them. Reinvesting opens upopportunities for the native communities’ to access employment, better socialinfrastructure among others.
Therefore improving their standard of living andpropelling economic development. CONCLUSION. The role of financialinstitutions regulators is indispensable from the impact that bankingregulatory law will have on poverty reduction and economic development. Theonus is therefore on them to create a policy environment that not only protectsconsumer interests but also guarantees financial institutions ability toefficiently remain in business without so many constraints, able to reach outto so many other more consumers especially in unbanked rural areas.
For bankingregulatory law to reduce poverty in developing countries, there is need for itto among other things have the ability to coerce and encourage financialinstitutions to be financially inclusive of the poor and under privilegedpersons that are normally left out of the financial system due totechnicalities. Financial inclusion, makes financial services accessible tomajority of the populace. As evidenced above, it’s no doubt that access tofinancial services fosters financial development which empowers people to save,invest and profit, ultimately reducing poverty and leading to economicdevelopment. 1 Feldstein, Martin, “The riskof Economic crisis introduction”. Chicago, 1991. 2 http://www.
hg.org/banking.html.(last accessed on 28/12/2017 at 12:20pm) 3 https://en.wikipedia.org/wiki/Bank-regulation.(last accessed on 28/12/2017 at 12:30pm)4 Bryan A Garner, Black’s Law Dictionary, 8th Edition 2004, at page3708. 5 http://en.
wikipedia.org/wiki/poverty.(last accessed on 28/12/2017 at 12:35pm)6 Definitions.
uslegal.com/e/economic development (accessed on30/12/2017 at 4: 03pm).7 https:/www.oecd.
org/eco/growth/40505986.pdf. OEDC Economic studies,No .43, 2006/2.8https://www.adb.org/publocations/role-financial-intermediaries-poverty-reduction.9 www.
ubos .org>uploads>ubos.10 Supra ,811 Fsduganda.or.
ug/financial inclusion-is-vital-toend-Uganda’s-poverty. (Last accessed on 29/12/2017). 12 https://www.bis.org/publ/bppdf/bispap62g.
pdf.(last accessed on 28/12/2017). 13 Uganda, south Sudan, Congo among others. 14 Scholar.
harvard.edu>files>rpande>files. (Last accessed on29/12/2017).15https://medium.com/@IFC.org/why-digital-banking-services-are-vital-to-reduce-poverty-in-the-developing-countries.16Supra, 12.