December 10 was an historic day for the US because that day president Bush inaugurated “Business Strengthening America”, an organization aiming “at encouraging the civic engagement and volunteer service by corporate America”.

In recent US history, this high-profile occasion was the second instance of public expression of the government’s resolve to seek corporate involvement in community service. On an earlier occasion, President Roosevelt had declared that he believed “in corporations; they are indispensable instruments of our modern civilization, but I believe that they should be so supervised and so regulated that they shall act for the interests of the community as a whole.”

The resolve expressed by President Bush wasn’t a voluntary act; collapse of large corporations, and a rash of scandals rooted therein, made American businesses seem like ticking bombs that could leave entire communities devastated when they exploded unexpectedly. They seem to do so frequently, and not just in America; it now happens in almost every “market-based” economy where the regulatory role of the state has been marginalized.

In the criticism that followed, while corporate America remained under attack, not enough was said about two key wrongdoers — bankers and market regulators.

The debate is missing out on a key issue — the role of financial institutions that help create and sustain monsters in the business sector. Businesses, especially big ones don’t become virtual empires (as they do now in a matter of years) without huge dozes of borrowed money.

Financial institutions, especially depository institutions such as the commercial banks, channel common man’s savings into these cold and uncaring institutions although banks profess that they extend credit only to the enterprises that perform both legally and socially acceptable commercial activities.

In today’s competitive business environment, blind pursuit of profit takes the better of bankers’ senses blinding them to the reality that, of all commercial enterprises, they owe the most to the public in terms of social responsibility because they survive on peoples’ wealth and trust. The enormous bad loans that banks carry on their books are reminders of not just bad lending judgment but of deliberate acts of enriching corrupt businesses and individuals without leaving traces thereof for accountability.

This sums up the state of bank lending in developing countries besides developed countries such as France, Italy and Japan. While in the West, bankers are occasionally held accountable, instances thereof in Pakistan are rare. Those indicted, walk away with light sentences and the beneficiaries arrange their passage to the West — high profile safe haven.

In spite of the propaganda about the rising cost-efficiency of businesses, there isn’t much to show in terms of social uplift there from. Instead we see falling economic growth, rising unemployment, poverty and terrorism.

The recent appalling incidents of greed, corruption, fraud, embezzlement, the manufacture and marketing of untested, sub-standard and environment unfriendly products, tax evasion, and other blatant violations of law by businesses belie the lofty claim of the financial institutions about supporting socially responsible enterprises.

The unpleasant truth is that, in many instances, financial institutions funded corrupt enterprises, the worst being the flight of capital through fake trade transactions and money laundering that left the poor countries impoverished. The Swiss bankers innovated this technology, which is now employed by banks the world over, especially the US banks.

Besides, the disloyalty to depositors (deploying their savings in shady enterprises), the banks consistently refuse to compensate small depositors either by paying them a fair return on their savings or lending to them citing collateral inadequacy as the reason. This profile of banking achieved nothing except push up the poverty level everywhere.

Rising poverty, that threatens to damage the societies beyond repair, is the result not merely of the misadventures of business enterprises; it also has do with the misdeeds, both deliberate and forced, of bankers — custodians of peoples’ wealth.

In the past half a century, it did not occur to our bankers that while the common man’s savings were used by them to finance big businesses, he never benefited from the banking system. To compensate for their own incompetence in lending risk assessment, banks kept the collateral requirements so high that only the already rich could borrow from the system, thus shutting the door on borrowing by the common man.

Ironically, this lending culture, which virtually precluded the setting up of small businesses at a scale necessary to sustain steady economic growth, enjoyed bank regulators’ blessings all these years. Neither bankers nor policymakers noticed the developing structural flaw. Their failure to act responsibly in the past is written large on the pages of history. The recent move towards setting up the SME banks and forcing the commercial banks to initiate consumer banking activities too is not voluntary; pressure from the WB and the IMF to contain poverty, and flooding of banks with virtually unmanageable liquidity after 9/11 are the driving forces behind this apparent change of heart by the bankers.

But while they pay lip-service to propping up small businesses, they keep lending to big businesses as before, placing profit ahead of all other considerations although, as judicious allocators of the nation’s wealth their yardstick for selecting borrower-customers aught to be the future economic and social benefits promised by the customers’ enterprises, not merely the profit there from.

Ironically, these considerations don’t figure as the crucial factor in bankers’ risk selection systems — an attitude that belies their professed commitment to social responsibility.

Banks, like all other businesses, now pursue activities that help them earn higher profit i.e., maximize shareholder value irrespective of what havoc it may play with the rest of the society. The drive for freeing economies without building adequate safeguards into the regulatory systems to confine market player’s new-found freedom within socially acceptable parameters could have led to no better end.

Just compare the 0.5 to 1.6 per cent cut in the prices offered by auto assemblers with the advantages they enjoyed through the reduction (by over 8 per cent) in borrowing rates, and appreciation of the rupee’s exchange rate by over 10 per cent in past two years. This profitering simply went unnoticed.

Every study on the continuing global economic crisis drew attention to lax lending standards. Lending booms preceded economic breakdowns, and in almost every country, the bulk of bank credit financed risky transactions and businesses.

The depositors were exposed to risks that their bankers could not manage. The government involvement in banking made matters worse. Ministries urged the banks to lend to preferred sectors or firms with little regard for their credit-worthiness and efficacy. Connected lending i.e., to bank owners and affiliated businesses, was tolerated, even encouraged, setting aside the basic consideration of prudent lending. Banks that collapsed thereafter were revived with the taxpayers’ money.

Banks often lacked resources, both human and technological, to enforce prudent lending standards in the first place. Lending bankers and risk-management systems were stretched beyond the limits of their capability. This was equally true of the bank supervisors. Not only did they lack the skills and manpower to do an effective job but often remained under the thumb of ministries that are reluctant to curtail high-risk lending.

Forbearance meant going on lending until problems “went” away, and hiding the evidence of reckless lending. Bad loans were kept alive by allowing the borrowers to service debts with fresh loans. Accounting rules are twisted to conceal these misdeeds. Nearly all banks-in-crisis now show that they had vastly greater volumes of non-performing loans on their books than the figures admitted at the time.

The insensitivity of the state, almost everywhere, to rationalizing banking practices played a critical role in bringing about the disaster, the world faces today. It is slowly becoming conscious of its apathy as poverty levels soar uncontrollably. Where from to begin the process of reform is the challenge that now haunts governments everywhere. Not many are capable of facing up to it because they all seem to over-simplify issues; they only scratch the surface rather than go to the root of the problem. Pitifully, the state institutions — legislature, judiciary and market regulators - that are responsible for maintaining a balance between various interest groups don’t see an explosive scenario developing in this milieu.

Does it bother anyone that small savers, who contribute the largest chunk to bank deposit base, are paid a return way below the going inflation rate? That these miserable profit rates help justify the state’s lowering of profit rates on its own debt paper? That the industry is not asked to repay to saver-consumers even partially the benefit of cheap borrowings by lowering the prices of finished goods? Isn’t it the shortest route to impoverishing the largest number of people?

Given this state of affairs, is it surprising that the biggest problem confronting governments now is poverty — the mother of all evils? The governments lost the opportunity to stem the tide of poverty because the distinction between the state and a profit-seeking corporation was blurred and the state became as cold blooded as today’s businesses. It is time the state regained its exalted status of a ruthless referee that ensures a level playing field for all cross-sections of the populace.