- Commonwealth factor
- Commonwealth initiatives
- Banking operations within another country’s financial system – such as Barclays (UK), Standard Chartered (UK), Grindlays Bank (UK and Australia, operational until 2000), Scotiabank (Canada), Westpac Bank (Australia), ANZ Bank (Australia) and Standard Bank (South Africa)
- Offshore operations – predominated by the UK and Canadian banks setting up offshore banks in the Caribbean.
The Commonwealth factor in banking and financial systems
Legal systems, TNCs, getting credit and offshore banking
Banking and financial systems throughout the Commonwealth have become what they are due to a number of factors including the historical, economic and political environments.
Many Commonwealth countries’ legal systems are founded on English common law – a legacy of British colonialism. English common law, particularly unique to the Commonwealth, Hong Kong SAR, the USA and the Republic of Ireland has provided a backdrop for a more pluralist financial system which not only consists of banks but also active legal and fundamental financial entities such as trusts (unit trusts, investment trusts, mutual funds, trustee-managed pension schemes) which do not traditionally exist in all other legal systems. Indeed – in order to attract foreign investors – Rwanda, one of only a few Commonwealth countries without a common law system has moved to promulgate a ‘Trusteeship Law’ to form a legal basis for the creation and regulation of trusts and trustees. Numerous academic papers including those by Laporta et al (1997), Graff (2005) and Mahoney (2001)* contend that in general common law is more conducive to financial development and provides better investor protection than other legal systems. This favourable legal environment it is argued reduces the risk of expropriation that investors face.
The most essential benefit provided by the banking and financial services sector for most businesses is the availability and accessibility of loans or credit. Commonwealth countries are some of the easiest places to access credit. The World Bank in its 2012 Ease of Doing Business Index report ranks six Commonwealth countries among the best countries to acquire credit in the world. All tied exclusively in 1st place out of 183 countries are Commonwealth members South Africa, Malaysia and the UK. New Zealand follows closely at number 4. Singapore and Australia are 8th and 11th respectively.
Following liberalisation the Commonwealth has seen a significant transformation of financial systems. Liberalisation policies typically involve the elimination of interest rate controls, reduced government interference of banking management decisions and the opening up of financial sector to foreign banks. Most Commonwealth countries liberalised their financial sectors in the 1980s and 1990s, primarily as a result of strong advocacy for financial reform from the IMF and the World Bank. The ushering in of new systems saw the emergence of new banks, new financial products and financial integration with the rest of the world.
Liberalisation proponents argue that the presence of an international bank is a good thing for most developing countries because it provides benefits such as financial sector stability, technology and knowledge transfer, enhancement of banking standards and codes of practice within a country and improved links with the globalised financial system.
Many transnational banks in member countries of the association are of Commonwealth origin and existed prior to liberalisation. Naturally the expansion of most of these banks into other member countries has mainly been from the developed part of the Commonwealth. Expansion has taken place in two ways, through the setting up of:
Standard Chartered, along with the now defunct Grindlays Bank, has been unique in that although domiciled in the UK their operations have been purely international with much emphasis on Africa and Asia and a strong Commonwealth bias.
Commonwealth countries and territories are the biggest offshore financial centres in the world. Countries such as Bahamas, Barbados, Belize, Singapore and UK overseas territories Bermuda, Cayman Islands and British Virgin Islands are synonymous with offshore finance. Advocates of offshore banking claim that it offers many benefits to host countries and territories. It provides income from direct employment of locals, benefits via spillovers to other sectors in the economy including other services such as tourism and infrastructure (e.g. telecommunication and transportation) and government revenue in the form of fees and taxes (Schipke†,2011).
Rafael La Porta, Floriencio Lopez-De-Silanes, Andrei Shleiferand Robert Vishny(1997) ‘Legal Determinants of External Finance’, reprinted in the Course Reader from the Journal of Finance.
M. Graff (2005), Are Common-law Countries better than Civil-law Countries in Protecting Investor’s Rights? In: G. Greulich, M. Lösch, C. Müller and W. Stier (eds.), Empirische Konjunktur- und Wachstumsforschung, Rüegger, Zurich, pp. 57–77.
Mahoney, Paul G. 2001. The Common Law and Economic Growth: Hayek Might Be Right. Journal of Legal Studies 30(June): 503–25.
Commonwealth initiatives: The Commonwealth Secretariat
The Commonwealth Secretariat is the most active organisation involved in promoting consensus- and capacity-building in international finance and capital markets in the Commonwealth. The Economic Affairs Division (EAD) of the Secretariat organises the annual Commonwealth Finance Ministers Meeting and meetings of the senior officials including central bank governors.
As part of a pilot project, EAD is undertaking an independent monitoring of donor and international financial institution support behind country-owned poverty reduction strategies. The reports from this project make valuable and concrete recommendations to governments, donors and Bretton Woods institutions. The issue of country ownership, participatory policies and home-grown development strategy are still somewhat challenging for some countries. A report on United Republic of Tanzania has been completed and a second on Ghana is under way.
Within the framework of the Commonwealth Private Investment Initiative (CPII), the division has supported the technical feasibility study of a Kula II investment fund for the Pacific region. The target capitalisation for Kula II is US$20 million, and the minimum investment size is US$100,000. The Fund will seek to broaden its investments to include several islands in the Pacific region. The total funds committed in the Pan-Commonwealth Africa Partners fund, a second generation fund for the region under CPII, at the end of November 2004 amounted to US$125 million. Under the first fund for Africa (Comafin), all companies will have exited at good profits by the end of 2006, the end of the fund’s life. Some of the returns are superior to those achieved by other Africa funds and are much higher than achieved on developed country stock markets. Read more on the Commonwealth Secretariat site.