The needed banking strategy (Of both government and private banks)

In order for a country to fully develop, it is a requisite, sine qua non, that its banking system be properly structured and guided. Banks play a critical role in a developing economy. The banking sector provides the wherewithal to finance business transactions. The banks lend the money needed by the entrepreneurs and businessmen to run and expand production. The banks direct the flow of money to the priority areas of development.

So, when a country does not have a good financial structure, as crystalized in its banking system, it can never and will never develop properly. For example, when banks do not extend loans to entrepreneurs, then naturally business will be unable to churn out its goods and products. Ergo, these necessary but locally unproduced goods will have to be imported. This defeats the very core strategy of an economy of self-sufficiency. When banks lend money, on the other hand, but do so on a short-term and high interest basis, then again the business sector is strangulated and can never meet its projected output on a sustained basis. Worse, when business is deprived of access to funds on a long-term and low-interest basis, then private business will be unable to employ people, or at the very best, can only under employ them. The private role, then, of banking in the macro horizon of development can never be overemphasized.

The most critical aspects of banking are central banking and development banking. Central banking provides the umbrella policies that direct money flow to where it is needed. Our monetary policies dictate which type of industries shall be provided with funds on a soft-loan basis. Development banking, on the other hand, directs the actual flow of money to the identified areas of development.

Against this backdrop emerges that vital triple role of the banking sector, both government and private, in the overall scheme of development.

First of all, the banking sector must supply and circulate the proper amount of money. Money supply should be sufficient enough to underwrite the needs of development. For money is to business as water is to life. Without water, there is no life; without money, there is no business. Without adequate water, life will not be sufficient; without adequate money, business will not be sufficient. It is that simple.

Secondly, our monetary policies should be geared towards channeling the money supply to areas of activity that further promote production. In particular, funds should be made especially available to the impact industries – the strategic industries that provide the foundation and base of our industrialization effort. Money should also be made readily accessible to the business sector engaged in the procurement and use of capital goods.

Thirdly, the banking system, through both public and private development banks, must actually assist entrepreneurs and businesses engaged in the identified priority areas of development by providing them with funds and money as loans on a long-term and low-interest basis.

With such a guided channeling of the money flow, there is no doubt that the impact industries will develop; that the seed, now sufficiently watered, will germinate and grow.

The Japanese actually traveled that way. In postwar Japan, the priorities of capital rationing were set by the Ministry of Finance congruent and in harmony with the industrial goals promoted by the Ministry of International Trade and Industry (MITI).

What happened then was that priorities of loan needs were made known to the business sector so that private manufacturing firms could adapt their growth plans to the suggested priorities. The government classified industries into four categories based on its priorities: A-1, A-2, B & C. A-1 industries were petroleum, coal, steel and fertilizer. A-2 industries consisted of electric and non-electric machinery, shipbuilding, sheet, glass, plywood and transportation equipment. Loan priorities of these industries were further classified.

By channeling funds to Categories A-1 and A-2 and by discouraging consumer goods industries, Japan was able to expand its industrial base. Capital rationing, as can be seen, was the cornerstone of the indicative economic planning of postwar Japan.

We must do no less.

(You may write your comments/suggestions at 15/F Equitable Bank Tower Paseo de Roxas, Makati City or through e-mail at [email protected])

(Editor’s note: Atty. Roxas is writing a limited series of articles dealing with financial matters and other important business topics. He is available for speaking engagements on the subject matters of his articles.)