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Banks do not sabotage economies

A man and his wife owned a very special goose. Every day the goose would lay a golden egg, which made the couple very rich.”Just think,” said the man’s wife, “If we could have all the golden eggs that are inside the goose, we could be richer much faster.”So, the couple killed the goose and cut her open, only to find that she was just like every other goose. She had no golden eggs inside of her at all, and they had no more golden eggs.
The Sunday Nation on March 4th 2018 published an article titled “New credit law to help small firms”. The article featured a debatable quote from the Member of Parliament for Kiambu constituency Mr Jude Njomo who shot to the national limelight with his successful Banking Act (Amendment) Bill 2015 that capped interest rates for Kenyan banks.Close to a year and a half later, with credit in the economy at an all time low and a significant drop in the profitability of the entire banking sector, Jude Njomo was quoted as saying,“The credit squeeze to SMEs is a deliberate effort by commercial banks to sabotage the economy so that the government may influence Parliament to remove the interest rate caps.”

Parliament was about as smug as a bug in a rug when they passed the interest rate capping law. The collective view was that banks needed to be taught a lesson and to be dictated to on how to do business. However, the reverse happened. Banks simply stopped lending as it was not worth the risk and the funds that were meant to fuel the economy through lending for working capital and capital expenditure simply moved to the safest borrower of all mankind: the sovereign.

Mr. Jude Njomo and his legislative colleagues need to be disabused of one notion: You cannot juxtapose the word “banks” to the words “sabotage the economy” and expect a logical outcome. If anything, that is a fairly fallacious theory. It is about as oxymoronic as placing the words “parliament” next to the words “bans salary increases for lawmakers”. The two concepts are mutually dependent. Banks need a thriving economy to ensure that there is credit uptake and that those credit facilities are repaid which obviously leads to profitable business. Parliament need never set a ban for legislator salary increases because…well you can fill in the blanks yourself on that one. Aesop’s fable above summarizes it well, one does not kill the goose that lays the golden egg.

Credit is the lifeblood of any economy. Banks take in deposits and use the same to lend out to various sectors based on how much of their own capital they have in the business, what is termed as risk based capital allocation. Lending to the sovereign via treasury bills and bonds consumes minimal capital while lending to Tom, Dick and Harry consumes maximum capital. As banks by nature of regulatory rigour require a lot of capital, their shareholders will demand a significant return on that capital and lending to the ordinary mwananchi is the surest way of sweating that capital more efficiently. In a speech to the Kenya Bankers Association Banking Research Conference last September, the Central Bank Governor Patrick Njoroge reminded the banks about why they were in the position they were in. “There has (sic) been concerns about the Kenyan banking sector’s high average ROA of above 3% and ROE of close to 30%, when compared to similar economies….In any case the high ROAs and ROEs are not sustainable in the long term as customers cannot afford the high cost of banking services indefinitely.”

The Governor has been consistently rapping the knuckles of the Kenyan banking industry and the intervening period between the interest rate capping bill becoming law and its impending demise requires banks to significantly change their mindsets away from the traditional lending models to more innovative ways to make income as well as assess borrower repayment capacity (the fintechcredit algorithm methodologies for non-secured lending are a case in point). The Governorin his speech categorically pronounced the regulator as a key supporter of lenders that are fairly priced, lenders that provide differentiated risk-based pricing based on a borrower’s history and lenders that disclose information in a transparent manner. Legislators needs to be alive to the regulatory premise as the basis on which they should hold the banking industry to account, and not through reckless statements that the banking industry is in any shape or form killing its own economic golden goose.

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Twitter: @carolmusyoka

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Pesalink Can Change Our Economy

[vc_row][vc_column width=”2/3″][vc_column_text]I recently ran a survey in Kenya’s 48th county, “Kenyans-on-Twitter” to see what people know about Pesalink and came to find out that most of them have heard of, but have never used the product. So I did some research and found that Pesalink is an initiative of the Kenya Bankers Association (KBA) to help Kenyans move funds from bank X to bank Y in a safe and convenient manner using their mobile phones. Assuming your bank operates in the 21st century, your phone number should be linked to your bank account. With that alone, you can use the Pesalink portal on your banking app to send money to buy your Toyota Probox (assuming it’s below Kes 999,999) to the car seller as you quaff a few drinks late Saturday night. Or send Kes 600,000 to Pastor Juma who’s selling that 100 by 50 plot in Kitengela, while you prepare your morning devotions at 4 a.m. on Sunday morning. Pesalink is also available on your internet banking app, ATM machine, banking agent and bank branch.

Straight through processing is what Pesalink is all about. It’s big brother RTGS – or real time gross settlement as it’s called – is also an initiative of KBA, and was created to allow faster settlement of large value transactions through a same day processing mechanism. Today you can’t issue a cheque for amounts over Kes 1 million as such a transaction has to go via RTGS. The direct beneficiary is the customer as the bank can no longer sit on the “float” as it waits to give the customer value for the cheque that has already cleared. The difference between RTGS and Pesalink is that the former requires you to walk into your bank branch and fill out a tedious form. The latter, however, is a few keystrokes from the comfort of your bar stool or Slumberland mattress 24-7. Both are KBA initiatives, which, when working optimally, should significantly reduce footfall as well as cash holding requirements in branches, the latter of which creates a trading opportunity cost for bank treasuries as it’s idle cash sitting in a vault.

I spoke to the team at the KBA-owned Integrated Payments Services Limited (IPSL), who operate the switch that runs Pesalink. The process is supposed to take at most 7 seconds for the transaction to go through. Since its launch in March 2017 until June 1st, the system has processed about Kes 2 billion between the 26 banks that have signed up to the system. Client ignorance on the one part and bank reluctance on the other are some of the reasons for the slow take up of the product. The bank reluctance, some say, comes from wanting to see stability in the system before launching big bang. My cheeky side wants to provoke and say the potential loss of float that banks will endure, as funds move real time, 24 hours a day, is something that would make any bank drag its feet to market this product. It also adds a new, but manageable challenge, for bank treasuries in squaring their cash positions once overnight fund movements become frequent.

Why should you consider moving funds this way? First it beats the exasperating Kes 70,000 transaction limit and Kes 140,000 daily limit on Mpesa. (Although it’s said that some banks have,counter intuitively, put in transaction limits. Why for the love of God?)Secondly, the fees have been capped at Kes 200/- no matter what amount is being sent. Thirdly, in case you missed it, the banks are running a no-Pesalink-charges campaign for the next two months to get customers onto the product. Fourthly, you can do it 24 hours a day 7 days a week. Finally there are no limits on the number of times you can send funds in a day.

The product is being launched in phases, primarily to get system stability and knock out the kinks before going full throttle. Today it’s serving Peer-to-Peer clients but the ultimate aim is for Business-to-Peer and vice versa, which would include government payments such as taxes and rates, or utility payments from businesses and individuals to KPLC and Nairobi Water. Pesalink provides one less reason to go to the bank physically and will be a key cog in the 24-hour economy wheel that we all wax lyrical about.

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Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]