Even more amazing was the fact that Shanxi, a remote northern inland province, emerged as China’s pre-eminent banking centre in the 19th century. The authors argue that Western influences may have been the catalyst, as Shanxi merchants ran a lucrative trade in tea across the Gobi desert into Russia right up to St. Petersburg. Exposure to the banking practices in the Russian capital may have helped the Shanxi bankers. Whatever may be the reason, the Shanxi bankers grew rapidly by providing bank drafts to merchants. During the colonial wars and uprisings of the 19th century, they expanded their services to the government, with one much-impressed emperor calling Shanxi’s Sunrise Provident Bank the “Clearance Everywhere Under Heaven Bank".

Illustration: Jayachandran/Mint

And finally, as an insurance against fraud, contracts permitted the enslavement of managers’ wives and children, a practice that many shareholders in the big Western banks hit by the crisis would doubtless welcome.

So why did this paragon of corporate governance collapse? A powerful owner changed the rules, assigned expertise shares in addition to his capital shares and interfered in lending decisions. It was downhill all the way after that. We have a lot to learn from the governance structures of the Shanxi banks.

Write to simplyeconomics@livemint.com

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