The World Bank yesterday delivered a timely reminder of the importance of the financial sector in promoting the growth necessary to lift people the world over out of poverty. British banks should take note.
A competitive banking sector is essential for giving the poor access to basic financial services and giving businesses access to markets – vital components of economic growth.
Yet since the financial crisis the globalisation of the banking sector has slowed and even gone into reverse, the report noted. Cross-border capital flows (including lending) are 65 per cent lower since 2007, according to consultants McKinsey. Banks in richer nations sounded the retreat, while developing nations closed their doors to lenders they thought were helping the contagion spread.
Sometimes these suspicions were valid, and banks can still fail the sniff test for local regulators – the controversial links between HSBC and Standard Chartered and the Gupta scandal in South Africa being a recent case in point.
However, protectionism has undoubtedly come into play. The World Bank’s message for developing nations is clear: removing the barriers to international banks can increase competition and deliver massive benefits to citizens as banks allocate capital to where it is most needed.
The flip side is that there is an opportunity for banks to operate in less developed nations: the size of the middle class is soaring worldwide as people get richer, and as people become richer their desire for financial services rises in tandem. Not for nothing are institutions pivoting to the East.
The risks of investing in some emerging markets are real, whether it be concerns over institutional weakness or even of expropriation by governments. Yet for British banks the opportunities are huge, whether it be China’s gargantuan One Belt One Road policy, or the potential for financial liberalisation in countries such as Vietnam or India.
The World Bank’s research shows that cross-border banking does not have to be a zero-sum game. If done right, lending to emerging markets can be an accelerator for development and a source of increased profits. That would be good for people in poorer nations and good for a global Britain.