for stability and growth –
with no economic black spots

Everybody working, everybody working efficiently, productively. That's the key to productivity and prosperity. And a key element in facilitating this process is secure, longterm finance for industrial and commercial investment. This in turn requires a new element in banking, a new facility: Development Banking.

Traditional banking practice requires pre-existing assets as security, and loans carry no long-term commitment.

Development Banking avoids these two limitations of traditional banking by securing the loan on the industrial or commercial project itself thoroughly researched and costed, rather than on outside assets alone, and by making a long-term commitment based on an intimate involvement with the business or project in which it is invested. Involvement in the business ensures longterm commitment.

This facilitates the creation of new business and new jobs, as well as providing secure finance with which existing business can maximize its quality and productivity. Local infrastructure can also be financed. By setting up Development Banks to operate at regional level, focusing on regional and local needs, the benefits can be spread widely and uniformly, avoiding the usual pockets of non- or under-development.

The Development Banks would be formed to create new business and new wealth where none previously existed, not (in the words of comedian Bob Hope) “to lend money to people who can prove they don't need it”. The availability of investment credit has enormous potential for growth, and the Development Banks should actively be seeking to maximize the productive use of this resource.

The major distinguishing feature of the Regional Development Bank (RDB) concept is that a total project, from design through production and management to sales, becomes the loan collateral, rather than the personal assets of individuals.

RDBs would be authorized to create loans based on project collateral, not required to maintain “reserves” in the current banking sense. In the current banking tradition, a bank's reserves are instituted as, and traditionally regarded as an insurance against losses, but in practice insurance is no better than the risks it insures. Experience in 2008-9 has shown bank assets woefully inadequate to cover bad investments and gambling risks.

The RDBs would rely for their security on thorough research of loan projects in which they are invested, on a close working and constructive partnership with the loan recipient, and a detailed follow-up of results.

Loans would be made to encourage and develop new startup enterprises large and small, to secure, expand and improve existing enterprises, and for major regional infrastructure projects, the latter in conjunction with local authorities and national planning.

In each and every case, the granting of a loan is preceded by a thorough and complete business plan providing full working detail, proposed use of the loan funds, and precise projections of sales, income and expenditure as appropriate for each project, as well as anticipated repayment schedule.

The RDB would maintain a register of specialist firms, contractors, business advisors etc who can be called upon to verify loan clients' cost estimates and provide setup advice in forms varying from design of factory premises to promotion and accounting. Skilled commercial, architectural and technical advice would be available, either to assist existing enterprises or to promote new ones.

Once launched, the new enterprise manages itself but the Bank receives a flow of data – production, sales, profits and so on – from which the new enterprise's progress can be monitored and compared with projections. If anything begins to go wrong, the Bank can give timely help, with advice or further finance if appropriate. An investment loan is best secured by ensuring the success of the project in which it is invested.

The partnership concept also assumes longterm commitment, resulting in the encouragement of secure long-range planning and productivity investment, research, and development of new-generation products and services.

In the case of larger businesses, the investing bank may well appoint a Director to the Board, as has been the practice in Germany. Careful monitoring will be to the advantage both of the investing bank and the recipient business, as well as to the regional economy: bankruptcy is not contributive to economic stability and prosperity.

With a guarantee of adequate long-term finance, the recipient business would be properly set up, equipped and maintained, able to maximize quality and productivity. Indeed the provision of finance for any business or project would be conditional upon the rigorous application of all relevant quality standards pertaining to product design and every aspect of the production process.

From a financial point of view, it may be noted that investment in, and supporting solidly based businesses presents far greater security to the overall financial system than un-secured gambling in complex and largely incomprehensible “financial instruments”. And from the business point of view, longterm, secure investment and involvement by the Development Bank frees the recipient business from the constant pressure to maximize profits – if necessary through risk and adventurism, focusing attention on stability and steady growth.

Regional Development Banks would set their own charges based on administrative costs and loan insurance. There is of course an element of risk in any investment. The more useful approach however, is to minimize risk through proper pre-investment research and positive on-going monitoring of physical production, sales, and accounting – precisely the measures which a banking-industry partnership system is able to undertake.

The banking-industry partnership would therefore be in a position to offer investment at a constant, and relatively low cost, possibly 2-3%, backed by the on-going monitoring of the recipient business ensuring safeguards for the investing bank, the recipient business and all those involved with and dependent on it.

The RDB could also provide investment finance for regional infrastructure, such loans to be repaid by the relevant local or regional government departments from their own revenues. Thus the RDB would prove a powerful catalyst at regional level, providing finance and subsequent ongoing supervision for business and industrial development, together with investment capital for regional infrastructure.

Regional Development Banking provides genuine, repayable investment loans, avoiding the need for deficit-increasing grants.

While the Development Banking concept represents a major departure from the traditional Asset-Based Security, the concept is not new. Founded some 60 years ago, the now highly successful Mondragon cooperative group in Basque Spain illustrates this ongoing relationship between investment banking and recipient business. The Workers' Bank serves three mutually inter-dependent functions: it provides investment as a local development bank, offers technical and financial advice for business startup, then monitors production, quality, and financial performance in a process of ongoing cooperation and partnership.

The ongoing partnership concept also assumes longterm commitment, ensuring finance for secure long-range planning and productivity investment, as well as research and development into new-generation products and services, ideally in conjunction with apprenticeships and higher education.

In Bangladesh the Grameen Bank (GB) has reversed conventional banking practice by removing the need for collateral and has created a banking system based on mutual trust, accountability, participation and creativity. GB provides credit to the poorest of the poor in rural Bangladesh, without any collateral, and has succeeded in improving the lot and the prospects of thousands of the very poor.

In Germany, the Regional Banks, or Landesbanken have traditionally provided low-interest loans to local firms, both as startup capital and as on-going investment. In the post-WW2 years, the Landesbanken played a major role in the creation of Germany's “Economic Miracle”, in particular through the provision of on-going credit to the German “Mittelstand” (small and medium-sized companies) in their respective regions, now one of the enduring backbones of the German economy.

Regional Development Banks would be fully equipped to identify and invest in local infrastructure and industry, investing to provide major infrastructure secured by future income, for example from an uplift in business rates. Applying the model to four live case studies in Britain, a report by accountants PriceWaterhouseCooper has demonstrated that by using this approach, increases of between 50% and 80% can be achieved in housing, jobs and economic output. Note the significant factor here is that we are looking at investments, not deficit-increasing grants.

The potential benefits for many kinds of infrastructure, including transport, are considerable. The combination of largely autonomous Regions based on core cities and their economically dependent regions, each with its own Regional Development Bank empowered to make loans for industrial and infrastructural needs, can provide secure investment in new businesses, jobs, and productivity-enhancing improvements in existing industry and infrastructure.

The Economics of Prosperity

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