Why we should embrace institutional diversity in banking

The contribution of institutionally diversified financial sectors to more sustainable growth and financial stability-in particular the role of effective local banking structures—is not always fully appreciated, whether in the context of development cooperation or in policy discussions in the advanced economies. At the same time, a growing number of studies-ranging from analyses of the drivers of financial inclusion in developing countries to assessments of various banking groups’ performance during and after the global financial crisis (GFS)-find that financial institutions whose business models focus on local economies, retail and relationship banking do, indeed, have a positive impact on economic development, growth and financial stability. Those findings are also supported by a closer examination of the factors, which contributed to the successful evolution of the German savings banks and cooperative banks over a period of more than 200 years. These factors include: the concentration of their banking activities on a limited geographical region while working as a network of cooperating autonomous institutions; the prioritization of savings mobilization; a mandate to serve the economic and social wellbeing of the local region, while remaining profitable and financially viable over the long run, rather than narrowly focusing on profit maximization. Similar success factors can also be observed in the context of financial institution building and the deliberate promotion of locally oriented and people-focused microfinance and banking institutions in several developing economies.