Need for a regulatory framework

RELATIONSHIP BANKING AND ETHNICITY IN COLONIAL INDIA: In colonial India, there was widespread prevalence of relationship banking. Kinship networks provided intricate webs of trust. Some of the Indian bankers had branches or agencies spread all across India - from Peshawar to Guwahati - long before the three government-backed Presidency Banks opened branches in their respective areas of functioning. The power of those networks of Indian bankers became evident in the 1890s, when the stoppage of free coinage of silver in official mints (the period of the so-called 'limping standard') caused extreme stringency of credit.
J.H. Sleigh, the secretary of the Bank of Bombay, in a letter to the Times of India claimed that the shroffs who financed the whole of the internal trade of Bombay, generally stopped raising their rates above 8.0 per cent even when the rates of the three government-supported Presidency Banks went up far above that, accommodate one another's bills at even lower rates.
But, of course, while these network relations benefited the favoured clients of the shroffs, they were also discriminatory towards others. The Marwari shroffs in Burrabazar lent money to the traders of their own community often at rates at which they borrowed from the Bank of Bengal, but charged much higher rates of interest for loans to Bengali merchants and Nakuda merchants, that is, non-Bengali Muslim merchants trading with West Asia.
The Bank of Bengal added to the discrimination by dealing directly only with the Marwari shroffs, whom they regarded as more creditworthy than the Bengali and Nakuda merchants. Discrimination in rates or access went to an extreme level when it concerned the lowest rungs of society. For example, in the districts with large tribal populations, kali paraj, or dark-complexioned castes, had to pay higher rates of interest than ujli paraj, or fair-complexioned.
Modern limited-liability joint-stock banking was introduced in South Asia by the colonial rulers, when they gave parliamentary charters to the state-backed Bank of Bengal (in 1809), Bank of Bombay (in 1840) and Bank of Madras (in 1843). Ethnic discrimination prevailed in the management of these banks and in the treatment meted out to Indian as against European borrowers. Except in the case of the Bank of Bombay, none of these banks had Indian directors between 1810 and the end of World War I. Except again in the case of Bombay, no Indian borrowers enjoyed cash credit facilities at these banks. They had always to deposit government bonds or other approved securities in order to obtain a loan. No Indian was put in charge of a branch until the onset of World War I.
DEVELOPMENTAL BANKING, ANOTHER FORM OF RELATIONSHIP BANKING: Among the developing countries or regions, the newly industrialised states of East Asia - currently led by the People's Republic of China (PRC) - the second largest economy of the world - and followed by the Republic of Korea (ROK) or South Korea, Taiwan and Singapore largely escaped the kind of implosion of the economy that was caused by the deregulated behaviour of the finance companies and the stock market. These states followed the Japanese strategy in at least three directions:
l First, even when they were greatly dependent on the aid of the USA and other Western powers, they followed an autonomous economic policy.  In the case of the PRC, of course, except for a very brief period in the beginning of the 1980s, no foreign aid was received from the Western powers. One key instrument for attaining and sustaining policy autonomy was the promotion of exports, even while protecting the domestic market for infant industries, some of which later emerged as world leaders in export markets.
l Second, the government played a dominating role in the allocation of foreign exchange and other critical resources needed for economic development.
l Third, banks were the major sources of financing long-term economic development, so that the East Asian trajectory of development is sometimes described as bank-led growth. Currently, Vietnam is successfully pursuing similar strategies for economic and human development.
There are many lessons other developing countries can learn from East Asian success stories. Confining myself to the banking sector, I would argue that developing countries should abandon the model of so-called universal banking, which many of them were persuaded or coerced into adopting by the pressure of domestic and foreign finance companies. There should be a development banking sector supported and carefully monitored by the government, which should insulate it from political finagling by imposing strict penalties for transgression. Banks should not be allowed to play the stock market. The equivalent of a Glass-Steagall Act should be passed by every country seeking to get on to a path of sustained economic and human development. The conscious promotion of SMEs by providing them with adequate banking facilities should be part of this strategy. As Paust has emphasised, in developing countries outside East Asia, 'the SME sector is much less developed and less active abroad, and is severely hampered by red tape, faulty macroeconomic policies, and a lack of financing, among others'.
To reiterate a point made above, the years from 2007 have seen the bankruptcy of some of the leading banks and finance companies following the diktats of deregulated finance in the whole world. In the UK, for example, Northern Rock, Royal Bank of Scotland and Lloyds Bank all became bankrupt, and were bailed out by the British Treasury at a huge cost to the public.
Ethical banking requires both the ability of bankers to exercise discretion on the one hand and constraints on the freedom of bankers to acquire assets and enter into risky businesses, such as investment in the casino of stock markets, on the other hand. These constraints have to be imposed by properly constituted public authorities, especially the central bank and the ministry of finance, working under the oversight of a democratically elected government. Ethical banking requires decentralised relationship banking and strict separation of banks and stock markets, on the lines of the Glass-Steagall Act or the system prevailing in South Asia before 1947.
CONCLUSION: ETHICS OF BANKING TO BE EMBEDDED IN A SYSTEM OF MORALITY AND JUSTICE: Amartya Sen, a prominent economist-philosopher of our time, has written extensively on ethics and economics. He has made a key distinction between deontological reasoning and consequentialist justifications for evaluating actions in the light of morality and justice. The simplest examples of the former are Immanuel Kant's 'categorical imperative' (you have to do it because it is your duty) or Krishna's argument in the Indian epic, Mahabharata, that Arjun must engage the Kauravas in battle, because as a Kshatriya prince it was his duty to wrest the kingdom from the Kauravas, even if that battle led to the death of near and dear ones. The consequentialist would weigh the consequences of the performance of the unquestioned duty before coming to the conclusion about the correct action. Sen has on the whole weighed in favour of the consequentialist position.
I also believe that consequentialism is the better barque to trust in the turbulent sea of human affairs. I want, however, to rejig that position a little. First, I want to ask where the duty of the deontologists comes from. One of the most famous of such commandments had been penned by Lord Tennyson in his 'Charge of the Light Brigade':
Someone had blundered. Theirs not to make reply, Theirs not to reason why, Theirs but to do and die.
Those six hundred of the Light Brigade had been pushed into a valley of death by a blundering commander in a purely imperialist war on foreign soil. Why was it their duty to die there?
I would submit that a commandment penned by Charles, Baron de Montesquieu in his Pensee no. 741 could be an approximate guide for evaluating the ethics of banking as indeed of many other kinds of action:
If I knew something that was useful to me and harmful to my family, I would banish it from my mind. If I knew something useful to my family but not to my Country, I would seek to forget it. If I knew something useful to my Country and harmful to Europe, or else useful to Europe and harmful to the human race, I would regard it as a crime.
If we heed this advice, then we can see that it is not enough to carry out variants of 'poverty reduction strategy programmes' (PRSPs), while unquestioningly implementing macroeconomic and financial policies that only increase inequality and exclusion of the vast majority of the people. Neoclassical economics, which has become the standard mental apparatus of policy-advisors in most countries blinds a practitioner to structural causality. It also blinds her to structural morality, if I may coin a phrase.
The latter requires a policy-maker to recognise that there are structural features of the society she is dealing with that no number of PRSP interventions in micro-settings can redress. The world has become full of unconscious Eichmanns, the Nazi executioner, who think that they are only doing their duty, without realising that they are thereby causing mass hunger and sowing seeds of terrorist wars of one kind or another. Ethical banking, following in the footsteps of Nurul Matin, will require the conscious flouting of Eichmannish norms of behaviour. All countries need a regulatory framework, overseen by a substantive and procedural democratic system (and not one that money can buy), so that every ethical banker is not forced to become a martyr.  
Dr. Amiya Kumar Bagchi is Emeritus Professor at the Institute of Development Studies Kolkata (IDSK), Paschimbanga, India. The article is based on his 14th Nurul Matin Memorial Lecture delivered at the Bangladesh Institute of Bank Management (BIBM) on
November 10, 2014.