Financial systems and development

Box 3.4 Financial underdevelopment in Nigeria
In the late 1940s, Nigeria had a population of 30 million colonial and local banks greatly expanded the number
and no more than twenty-nine bank branches. Seven- of branches so that by 1962 there were more than 200
teen of these belonged to the Bank of British West Af- commercial bank branches.
rica and eight to Barclays Bank (D.C.O.). The other African traders believed that the colonial banks were
four were branches of indigenous banks. In addition, mostly concerned with maintaining the dominance of
Nigeria had a post office savings bank, a network of expatriate trading houses. Understandably, colonial
credit cooperatives, and later on some development banks feared that loans to local traders and farmers
corporations. Moneylenders operated in the informal could be risky, but their failure to mobilize savings demarket
alongside other informal institutions known as posits is harder to justify. Indigenous banks attracted
isusu. funds from the public by offering attractive interest
Nigeria was the only country in Africa to develop rates, advertising (with an appeal to nationalist sentiindigenous
commercial banks (that is, banks incorpo- ment), and opening branches. The expansion of bankrated
within the territory and owned and managed by ing facilities by both colonial and local banks and their
Africans) before the late 1940s. Three indigenous banks success in mobilizing deposits before and after indewere
created in the 1930s to serve the African popula- pendence indicated the potential for changing the savtion,
but of these only the National Bank of Nigeria ings and financial habits of the local population-a posurvived.
In the early 1950s the number of indigenous tential that went untapped because of the colonial
banks increased, although most of them soon failed. banks' orientation toward the expatriate communities.
Then in the years before and after independence, both
Box 3.5
Indigenous banking in India
At independence, India had an indigenous banking cial banks. Such bankers were collectively known as
system with a centuries-old tradition. This system had Shroffs, a term that probably originally referred to
developed the hundi, a financial instrument still in use money changers but over time came to refer to the
that is similar to the commercial bills of Western Eu- more sophisticated and influential indigenous bankers.
rope. Hundis were used to finance local trade as well as The main moneylenders were the Sowkars (who lent to
trade between port towns and inland centers of pro- farmers from their own resources or funds borrowed
duction. They were often discounted by banks, espe- from the Chettiars and other indigenous bankers) and
cially if they were endorsed by indigenous bankers.
the Pathans (who lent mainly to poor people and often
Indigenous bankers combined banking with other ac- resorted to intimidation to ensure repayment).
tivities, much as the goldsmiths, merchants, and ship- Indigenous banking was based on an elaborate and
pers of eighteenth- and nineteenth-century Europe had extensive network of personal relations that overcame
done. They usually belonged to certain castes or com- the problems of dealing with large numbers of cusmunities,
such as the Multanis, Marwaris, and Chet- tomers. Brokers were used for making introductions
tiars, and they differed in the extent to which they and vouching for the creditworthiness of individual
relied on their own resources, rather than deposits and borrowers but did not offer personal guarantees. Some
other funds, for their lending. Indigenous bankers of- brokers specialized in introducing indigenous bankers
ten endorsed hundis issued by traders and sometimes to commercial banks, while others brought together
provided personal guarantees for loans from commer- traders and indigenous bankers.
Throughout the nineteenth century, Latin Amer- borrowing; the overissue of currency; imprudent
ican countries relied too much on foreign capital. domestic banking; speculation in commodity, se-
Argentina and a few other countries developed ac- curities, and foreign exchange markets; excess cative
mortgage-bond markets and stock exchanges pacity in industry and commerce; regional wars;
alongside thriving but fragile banking sectors. Un- and internal political unrest. Many of these were to
fortunately, however, recurring financial crises un- figure in the debt crisis of the 1980s.
dermined attempts to develop the system ade- Latin American economies ran for long periods
quately. Finance lagged behind the region's with inconvertible paper money, high inflation,
achievements in infrastructure, agriculture, and and depreciating exchange rates. Producers and
mining. Instability resulted from too much foreign exporters of primary commodities welcomed this;
48