While bank regulators in the industrialized nations applaud their well-coordinated global shutdown of BCCI, their developing-country counterparts are angry that the self-described "Third World banking model" could be treated so harshly.

But these regulators fail to understand that much of the recent pain inevitably lies with the model itself.

'Local' Bank in Many Nations

In the 20 years since its founding by a Pakistani banker who obtained backing from Persian Gulf investors, Bank of Credit and Commerce International contributed positively in many respects to Southern Hemisphere economies. It offered small business lending and modern financial services in developing regions and built an enviable reputation for innovation and informal trust. Its generous returns and borrowing terms attracted the poor and wealthy alike.

Despite having legal headquarters in Luxembourg, BCCI was considered a local bank throughout Latin America, Asia, the Middle East, and Africa. To reinforce this image, it openly flouted Western management and credit techniques by shunning paperwork and risk limits.

The bank seized trade finance opportunities that American, European, and Japanese banks ignored, and it aggressively courted marginal public- and private-sector accounts.

Drawing on strong South Asian roots, BCCI underwrote 10% of textile exports from Bangladesh, the country's top foreign exchange earner, and offered similar support to expatriate communities in Hong Kong, Great Britain, and elsewhere. In even the remotest areas, BCCI bankers did not hesitate to commit funds to credit-starved shopkeepers on the spot.

However, indictments by the U.S. Justice Department and New York District Attorney charge that legitimate commerce was not BCCI's main concern worldwide. Instead, the bank's executives are accused of running a "criminal enterprise" specializing in money laundering, arms dealing, and tax evasion.

Varying Legalities

But in developing countries, many of these activities are not illegal. Only the alleged deception - masking bookkeeping irregularities and capital weakness, which placed depositors at risk - is grounds for punishment.

Regulators in the developing world were unable to uncover these discrepancies on their own, at least partially due to deficiencies in overall banking policy. Restrictive national approaches typically allow little foreign competition and, therefore, no basis for comparison between BCCI and genuine world-class banks.

Evaluating respective accounts and operations could have clearly revealed financial gaps and questionable transactions difficult to detect in a purely domestic context.

But foreign banks, other than favored institutions like BCCI, are often discriminated against - severely reducing their scope of local activity - or denied entry altogether in developing countries.

Benign View of Barriers

Liberalization, in the words of the United Nations Conference on Trade and Development, would "spell dangers" for the Third World. It would jeopardize the survival of native banks unable to marshal equal resources and would undermine monetary policy as exchange controls were lifted to ease access.

In its 1991 annual report, the U.N. agency further asserted that Western banking methods are inherently at odds with development objectives. It criticized the "speculative potential" of international financial flows and even the availability of foreign currency accounts.

The preferential treatment that offered fertile ground for BCCI's wrongdoing is vital for state credit allocation, the group concluded.

But such charged rhetoric hides a sobering reality.

The rigid framework it advances prevented the transfer and upgrading of skills and standards that could have exposed BCCI's darker side and promoted ready cooperation with the overnight action by industrial countries' regulators.

Mr. Kleiman is president of Kleiman International Consultants Inc., New York.

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