This essay prima facie requires a scrutiny of how banking
regulatory law can reduce poverty and support economic development. However, this
paper probes into a number of aspects pertaining banking regulatory law, with
focus on how it can be used as an engine to foster economic development and
reduce poverty especially in the developing countries of the world.
this paper first highlights the basic terms that form subject matter of the
entire discussion; Banking regulatory law, Poverty reduction, and Economic
development. Secondly, it examines the relationship between banking regulatory
law, poverty and economic development, plus the effects therein, and
furthermore it portrays the role of banking regulatory law in economic
development, how it can be used as a tool to foster economic development and
recommendations on its usage. Finally is a conclusion.
The banking system as a whole is
a `public good’ that benefits the
nation 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 to
protect the solvency of their own institutions, they do not adequately take
into account the adverse effects to the nation of systemic failure. Banks left
to themselves will accept more risk than is optimal from a systemic point of
view. That’s the basic case for government regulation of banking activity1.
is no explicitly compiled definition of banking regulatory law, however, a
close examination and understanding of what constitutes banking law and banking
regulation brings one to a conceptualization of what banking regulatory law is.
Banking law is law that deals with the various transactions that arise as
financial institutions go about serving their customers and growing their
Banking regulation is a form of government regulation which subjects banks to
certain requirements, restrictions and guidelines designed to create market transparency
between banking institutions and the individuals, corporations with whom they
Impliedly, banking regulatory law is law governing banking institutions as they
go on with their day to day transactions with customers. It’s no doubt that
these regulatory laws are engineered by the governments to achieve certain
objectives and overcome the adverse effects of bank failure. Most nations accordingly
have agencies in place that ensure compliance to the banking regulations.
Poverty is defined as, the condition of being
indigent; the scarcity of the means of subsistence.4 It’s
a 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 a
day 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 the
This refers to the increase in the standard of
living in a nation’s population with sustained growth from a simple low income
economy to a modern high income economy6.
Economic development is related to increase in output united with improvement
in social and political welfare of people. Most times it is through policy
intervention towards desired objective that nations can bring forth economic
RELATIONSHIP BETWEEN BANKING REGULATORY LAW, POVERTY AND ECONOMIC DEVELOPMENT.
Bank regulatory law is mainly concerned with
financial institutions, whose services directly impact on poverty levels and
economic development. The operation of the financial system can have a key
impact on economic growth and the stability of the economy7. This
relationship between banking regulatory law and poverty reduction is twofold, and
thus dependent on the policy environment of a particular nation. An inefficient financial system inevitably aggravates
poverty levels as it backstabs financial development, considering the fact that
majority of the populace may find it difficult to access financial services. In
most developing countries, it’s evident that various financial institutions do
not serve the poor because of perceived high risks, low profitability in small
transactions and inability to provide the physical collateral required8.
This distances the poor from formal financial services provided mainly by
banks, it’s no surprise that about 33% of Ugandans keep their money at home or
in secret places9.
It is important to state thus that such exclusion is discriminatory and leaves
most of the poor with limited access to finance for development.
However, we cannot exclude financial
development from the topic of economic development and poverty reduction. With
improved access to micro financial services, the poor can actively participate
in and benefit from development opportunities, since they can easily save,
borrow loans to build assets, develop micro enterprises and enhance income
It has been noted that poverty will reduce when people are able to use multiple
financial products such as savings to prepare for difficult times, borrow to
grow businesses, be insured against man-made and natural disasters, easily and
affordably receive and make payments etc.11. It’s
therefore upon the policy environment governing financial institutions that we
derive the relationship between banking regulatory law and poverty reduction,
economic development. The way these financial institutions are governed
directly impacts on economic development, depending on the aspirations and
objectives of the regulatory authorities.
Am certain that as long as the regulatory policies are suitable,
favorable and efficient to enable banking institutions serve equally all
classes of people in society then a nation is on the right path to reduce
poverty and develop economically. A detailed discussion of this is enunciated
BANKING REGULATORY LAW TO REDUCE POVERTY AND
SUPPORT ECONMIC GROWTH.
To ensure growth and
development with equity, financial sector policies are expected to be tuned to
sub-serve these broad objectives12.
Banking institutions provide financial,
investment and economic advisory services, these in a way foster poverty
reduction and economic growth because some lay business men are enlightened and
make right decisions and choices that ultimately profit them. It’s however
absurd that in a vast number of developing countries13,
financial institutions that provide such vital services are concentrated in
urban areas and limit their services to big stable commercial institutions and
well off individuals. In so doing, they side line the poor who miss out on
opportunities to access credit, save and develop financially. There is need for
regulatory authorities to enact laws that coerce financial institutions to be
impartial and accommodative of the poor and under privileged in rural areas,
thereby including them in financial development. The World Bank considers
financial inclusion a key enabler to reduce poverty and boost shared
prosperity. This move would ensure that banks are accessible by the poor and
under privileged for them to partake of many financial services like savings,
loans, insurance inter alia that propel them to financial development. It’s in
evidence that opening bank branches in rural unbanked areas of India was associated
with poverty reduction in rural areas14.
Financial inclusion of rural areas inevitably fosters rural household access to
saving and borrowing for investment which in a long run reduce poverty and
ensure economic development since even the poor/ under privileged are empowered
institutions also engage in a number of commercial activities, like investing,
monetary transactions. This exposes them to a number of risks like credit risk
due to failure of debtors to meet obligations and market risks as a result of
changes in market prices. The occurrence of such risks without measures to
safeguard against them is so detrimental not only to the banking institutions
but also their customers who are bound to suffer loss due to delay in
anticipated business transactions. This hinders and halts a number of business
activities that are meant to grow banking institutions and also financially
develop their customers hence dragging economic development. There is need for
regulatory agencies to enact regulations that mandate financial institutions to
hold certain minimum amounts of capital in reserve against unforeseeable risks
they are exposed to. The law should also focus on banks having robust frame
works for risk management. Such regulations save a lot from delay and wastage
of time and also ensures consistency provision of commercial and financial
services irrespective of the unfavorable circumstances surrounding banks , this
inevitably enhance economic development and reduce poverty.
finance services allow delivery of financial services at a reduced cost to
people who remain unreachable through the traditional banking systems15.
M-pesa, a mobile money transfer service in Kenya is a good example, it has
revolutionized the country’s financial services landscape16 However even in the 21st century
and age of technology, most financial institutions in some low income,
developing countries have not yet adopted digital services to be able to reach
out to most of their customers, this leaves lagging behind illiterate and
ignorant customers who miss out a lot of beneficial financial services. It’s in
evidence that, digital financial services enhance financial inclusion which is
so vital to poverty reduction. It is therefore necessary for regulators of
financial institutions enact laws that obligate and encourage banking
institutions to use technology and digital finance services to be able to
efficiently reach out to their customers tied up in traditional banking systems.
Lending to certain favored sectors of the
economies in particular nations is very vital, not only because they are the
backbone of those economies, but also because majority of the populace derive
its livelihood from therein. In Uganda, agriculture is the backbone of the
economy but it’s disheartening that majority of the peasants who engage in a
number of agricultural activities cannot easily access credit /loans from
banking institutions, to build up and expand their farming activities, they are
left out either because they do not have adequate prerequisite collateral or
due to lack of will by banks to lend to them. This leaves them incapacitated to
expand, profit and develop financially at a faster pace. Such priority sectors
are inevitable from the economic development of any nation because they are
central to the livelihood of most persons. There is necessity for governments to enact
regulations that require financial institutions to direct credit to priority
sectors of their economies and favor them when it comes to lending. Such a
regulation fosters the financial development of majority of the populace, as
long as they borrow, invest and build their assets. Thereby having banking regulatory law reduce
poverty amongst most people and enhance economic development.
Banking institutions engage in business activities and make quite huge
profits. Foreign banks normally repatriate profits back to their home countries
instead of reinvesting in countries in which they operate. This leaves
countries from which they operate benefit little in comparison to what they
lose in terms of what these banks get from their citizens. Some countries have
been so wise to curtail such mean activities by foreign banks, however majority
of the developing countries are still subject to such exploitation. Bank
regulators should enact laws mandating foreign banking institutions and
domestic ones too, to reinvest in communities in which they operate as a way of
giving back to such societies and developing them. Reinvesting opens up
opportunities for the native communities’ to access employment, better social
infrastructure among others. Therefore improving their standard of living and
propelling economic development.
The role of financial
institutions regulators is indispensable from the impact that banking
regulatory law will have on poverty reduction and economic development. The
onus is therefore on them to create a policy environment that not only protects
consumer interests but also guarantees financial institutions ability to
efficiently remain in business without so many constraints, able to reach out
to so many other more consumers especially in unbanked rural areas. For banking
regulatory law to reduce poverty in developing countries, there is need for it
to among other things have the ability to coerce and encourage financial
institutions to be financially inclusive of the poor and under privileged
persons that are normally left out of the financial system due to
technicalities. Financial inclusion, makes financial services accessible to
majority of the populace. As evidenced above, it’s no doubt that access to
financial services fosters financial development which empowers people to save,
invest and profit, ultimately reducing poverty and leading to economic
1 Feldstein, Martin, “The risk
of Economic crisis introduction”. Chicago, 1991.
(last accessed on 28/12/2017 at 12:20pm)
(last accessed on 28/12/2017 at 12:30pm)
4 Bryan A Garner, Black’s Law Dictionary, 8th Edition 2004, at page
last accessed on 28/12/2017 at 12:35pm)
6 Definitions.uslegal.com/e/economic development (accessed on
30/12/2017 at 4: 03pm).
7 https:/www.oecd.org/eco/growth/40505986.pdf. OEDC Economic studies,
No .43, 2006/2.
9 www.ubos .org>uploads>ubos.
10 Supra ,8
11 Fsduganda.or.ug/financial inclusion-is-vital-to
end-Uganda’s-poverty. (Last accessed on 29/12/2017).
(last accessed on 28/12/2017).
13 Uganda, south Sudan, Congo among others.
14 Scholar.harvard.edu>files>rpande>files. (Last accessed on