The Political Economy of Bank Regulation in Developing Countries Risk and Reputation (by Oxford University Press)
The book have mainly provided a wealth of empirical evidence on the political economy dynamics that lead regulators in peripheral developing countries to converge on, and diverge from, international standards. Our case studies provide compelling evidence of the powerful reputational, competitive, and functional incentives generated by financial globalization that lead regulators to adopt international standards, even when they are ill suited to their local context. A striking finding from our case studies is that politicians and regulators were the main drivers of convergence. In the countries where implementation was most ambitious, politicians played a vital role, championing the expansion of financial services and integration into global finance as an important component of their country’s development strategy. In some cases, regulators advocated convergence on prudential grounds, concerned about the increasing risks posed by internationally active banks. But we also found evidence of strong reputational incentives to implement the latest international standards, which are considered the ‘gold standard’ in international policy circles. We explain how our findings speak to wider debates in the literature, including over the agency of actors from peripheral developing countries in the global economy; relationships between firms, politicians, and the state in developing countries; the importance of policy ideas, particularly the role of the financial sector in economic development; and the inner workings of bureaucracies in developing countries. We highlight areas for future research, including fine-grained analysis of political dynamics within government institutions in developing countries, and the trade-offs associated with independent regulatory institutions.
The book have mainly provided a wealth of empirical evidence on the political economy dynamics that lead regulators in peripheral developing countries to converge on, and diverge from, international standards.
Our case studies provide compelling evidence of the powerful reputational, competitive, and functional incentives generated by financial globalization that lead regulators to adopt international standards, even when they are ill suited to their local context. A striking finding from our case studies is that politicians and regulators were the main drivers of convergence. In the countries where implementation was most ambitious, politicians played a vital role, championing the expansion of financial services and integration into global finance as an important component of their country’s development strategy. In some cases, regulators advocated convergence on prudential grounds, concerned about the increasing risks posed by internationally active banks. But we also found evidence of strong reputational incentives to implement the latest international standards, which are considered the ‘gold standard’ in international policy circles.
We explain how our findings speak to wider debates in the literature, including over the agency of actors from peripheral developing countries in the global economy; relationships between firms, politicians, and the state in developing countries; the importance of policy ideas, particularly the role of the financial sector in economic development; and the inner workings of bureaucracies in developing countries. We highlight areas for future research, including fine-grained analysis of political dynamics within government institutions in developing countries, and the trade-offs associated with independent regulatory institutions.
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Tanzania 207
simplify subsequent negotiations with the Bank on these issues’ (2005, p. 33). The
IFIs’ influence on the regulator meant that from very early on, the ‘spirit was to
adopt international standards’.5 Initially, however, IFI loan tranche releases were
linked to the approval of plans and enactment of legislation, rather than actual
implementation (World Bank, 1995).
As privatization got underway, the IFIs turned their attention to strengthening
supervisory capacities at the BoT. The first Financial Institutions Development
Project (FIDP) that ran from 1991 until 1996 facilitated the establishment of ‘most
of the basic skills for supervising banks’ within the BoT (World Bank, 2000, p. 13).
The focus on strengthening supervision was increased in the FIDP II from 2000 to
2006 (World Bank, 2000). Technical assistance was enhanced by the establishment
of the IMF East Africa Regional Technical Assistance Centre (AFRITAC) in 2002,
based within the BoT in Dar es Salaam. AFRITAC played a key role in providing
technical assistance to the Bank for Basel adoption, in particular for the move to
risk-based supervision in the 2000s (Chatterji et al., 2013), and subsequently in
drafting regulations for Basel II and III implementation (IMF, 2017b).
The period of regulatory hiatus in the 2000s was not the result of a rejection
of international standards in principle, but reflected the challenges of constructing
a set of market-based regulatory institutions from scratch as well as a lack of
incentives to push for greater adoption in a system that served the material
interests of a number of powerful groups. Despite the dominance of foreign
banks, the banking sector was domestically oriented and did not need to signal
creditworthiness to international investors, nor were the domestic banks interested
in entering foreign markets.6
Enduring links between the banking sector and powerful politically connected
figures also influenced the extent of banking regulation enforcement. In the 2000s
a series of grand corruption scandals linking politicians and local and international
business caused political reverberations within the ruling party (Gray, 2015). Some
of the most important scandals occurred within the banking sector and involved
the incumbent governor of the BoT, Dr Daud Bilali, as well as a previous governor,
Dr Idris Rashidi (IMF, 2018, 2017a, 2010, 2004). A number of commercial banks
were embroiled in these scandals as significant funds were moved in and out of
their accounts. While no commercial bank was taken to court as a result of these
scandals, one did agree to a Deferred Prosecution Agreement with the UK Serious
Fraud Office (Serious Fraud Office and Standard Bank Plc, 2015).
Despite these connections, some of the signals of clientelism—such as a high
level of NPLs, or bank failures due to overstretched capital—that were seen in
other countries in this study (notably Angola) were not evident in formal records
in Tanzania. Clientelist practices are always opaque, but the very serious lack of
5 Interview, Bank of Tanzania, July 2017.
6 Interviews, Tanzania Bankers Association and large commercial bank.
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