Behind these contrasting stances lie two different philosophies of financial development. The development banking concept was based on the assumption that financial resources are limited in a developing economy, and these have to be channelled to the right sectors so that the country can build up an industrial base. The theoryassumed that, left to themselves, financial markets would not necessarily allocate funds in an optimal manner, and the direction of credit is therefore necessary. The model envisaged a central role for the state and made the crucial assumption that state-directed credit would be more efficient than finances allocated by markets, and the markets were therefore kept segmented, in order to facilitate control. The universal banking model, on the other hand, believes that money should be left alone to find its own best uses. Under the model, there is no special virtue in long-term finance, and the rate of return on funds should determine where money should flow. In a capital scarce economy, this would ensure that the capital is efficiently used. Historically, countries such as Japan and Korea have used development finance institutions to push development, while the USA separated investment and commercial banking in order to ensure the safety of the financial system after the crash of 1929. In Europe, however,universal banking has long ruled the roost. Is there a middle path between the two models? Gupta may have hit the nail on the head when he said that long-term lending should not be sacrificed. Germany, for instance, has universal banking, and at the same time, their relationships with corporate clients ensure that companies have a stable, long-term source of funds, and are not left to the fickle mercies of the capital markets.

This is perhaps the model our financial system should follow. The focus must be on meeting the needs of industry, and universal banking should come about as a natural corollary of taking care of the needs of their clients.