Bank licenses are becoming currency, just like oil
The law of supply and demand is arguably the only concept in economics that virtually everybody knows something about. Although it has become slightly outdated and outmoded in modern economic theory, it still remains one of the basic premises when second year students have to struggle through their calculations trying to make sense of micro-economics, or sales and profits.
When an industry becomes expensive, it generates profits above the long term mean. This attracts competition, supply increases, and presumably prices stabilise, or deflate if the industry found itself in a bubble. Add to this very simple mechanism a host of political and societal expectations and one arrives at the misguided notion that any industry only needs more investment to become affordable, or to provide an affordable service.
Of course it is not nearly as simple as policymakers would like us to believe with their simplified notions, but it is still an attractive endeavour to reduce highly complex systems to simple, modular concepts so that everybody can understand.
To me it seems this may be happening in the banking sector. In 2006 before the Financial Services charter from which sprouted the Financial Services Strategy the debate revolved around three issues: 1. Accessibility i.e. banking the unbanked; 2. Affordability i.e. the cost of banking, and 3. Access to finance. In the formative years of this debate, local ownership was not one of the issues.
Around the turn of the millennium when it became apparent that local development could be fast tracked by using our own capital, another element crept into the discourse. More and more the question was asked: Who controls the financial institutions? At the heart of this vexing question was the consideration of how much capital must be repatriated and how fast. This eventually became formalised in a new concept – Domestic Asset Requirements, although it must be stated that DAR’s roots go back all the way to about 1991.
But the established commercial bank were reluctant to take the bait, and step into the roles of greenfields financiers. To conventional banking, these notions constitute incalculable risk and that is something the banking tradition abhors. They even formed an association to represent all the banks’ interest when engaging the regulator, the central bank. Eventually this evolved into a gentlemen’s stand-off where the regulator only made cosmetic demands, and the banks conceded cosmetic denouements. But the central bank had a card up its sleeve albeit one it was very reluctant to play.
The first attempt to widen the banking playground was City Savings and Investment Bank which became such a disaster and embarrassment, the fall-out lingers with us to this day. But it also effectively shut the door to new players for many years. That was until the third world development paradigm shifted and the concept micro-banking germinated into a feasible financing structure.
And over the recent past, the central bank has used banking licenses with a vengeance. The reasoning is simple and the logic unshakeable. If we can not move the established banks to step to the plate with meaningful solutions to address the original three considerations in the charter, then let us create space for more players, and plenty of them. This comes back to supply and demand.
If banking remains expensive, access to finance is difficult, and the majority is excluded from basic access to banking, the logical next step is to increase competition. Competition, it is envisaged, will force all banks to start targeting so-called sub-prime clients (in our context, the banks actually call them prime plus clients) while the drive to maintain profitability will force all banks to extend more credit, lowering standards for borrowers, lowering bank charges, and ultimately, lowering the cost of capital and their own profit margins.These ideas are very noble from a development point of view. If only we all could have access to cheap easy financing, we would turn into millionaires as everybody will be running his or her own successful business.
I do not oppose the proliferation of banking licenses. The strategy behind this is very clear although I doubt the central bank will agree with me. What I do caution about is the very fundamental fact that banks work with other people’s money. Were it not for this tiny inconvenience, banking would be easy. Banks operate on trust. They must be seen and be believed to be the custodians of their clients’ money. In our small market, where does one find a sufficient number of credible borrowers to carry all the banks that are now in the making?