The Role of a Banking System in Nation-Building

It seems strange to have a discussion of nation-building devoted to the importance of a banking system. After all, when we think of nations, we think of constitutions, borders, and functioning governments. When we think of failed nations, we think of a lack of effective government, a loss of control over society, and a breakdown in law and order. Banks hardly figure into that discussion at all. Indeed, in our society, while banks play an important role, they usually reside quietly in the background. Many of us never set foot in a bank. Our paychecks may be deposited in a bank, and if we need cash (a somewhat rare occurrence these days), we will go to an ATM. Of course a bank may be involved somehow in giving us a credit card or a debit card and may be involved somehow in providing an automobile or home loan. In many ways, banks are simply part of the general noise and clutter of modern society. We pay attention when something goes wrong, but otherwise banks are sort of like washing machines. They do their job, occasionally need fixing, but it is hard to think that a washing machine (or a bank) is all that important in nation-building. This Essay proffers the proposition that a banking system is more than background noise. A banking system functions as the heart and lifeblood of any functioning economy. A banking system is the key to economic growth and development. It is essential to unlocking wealth, creating opportunities, providing jobs, and facilitating commerce. It provides a mechanism for individuals and businesses to participate in the global economy. Importantly, banks, when they do their jobs correctly, allow their customers to have a vested interest in a strong and stable society. However, one no more builds a nation by establishing a banking system than one builds a nation by writing a constitution. A banking system is important in part because of the elements required to make it function: a legal system that respects contracts and agreements, honoring the rights of both debtors and creditors; an independent central bank; a judiciary that follows the rule of law; and a government that understands the importance of strong, healthy banks and provides sound supervision and a legal framework within which they can operate. Only then can the banking system accomplish its primary roles—that of providing a safe haven for the funds of the public and a means to devote those funds in productive loans to build the economy. A healthy banking system, then, not only helps build a nation for what it does, it helps build a nation for what it requires