Friday, 6 November 2015

Risky Sex: Shadow Banks & Conventional Banks

If you were born in the late 80's and early 90's, then your childhood was inevitably garnished with the infectious "susu box savings" culture. Some of us though, preferred perforating an empty milk tin to serve the same purpose. Adults around that period did their susu in groups; each member agreed to contribute a fixed amount monthly and a simple ballot determined who took the accrued sum each time the contributions were gathered. Speaking of "susu," literature suggests that the term originated from Nigeria, but then in 1955, Canadian Catholic missionaries formed what became known as the first credit union in Africa in the Northern part of Ghana. The formalization of micro-finance in Ghana began in the 90's and since that period, the commercialization of MFIs (Micro-Finance Institutions) and other financial institutions (collectively referred to as Shadow Banks in recent times) red-blooded the growth of small businesses and sole proprietorships. However, when Lehman Brothers collapsed in September 2008, it brought the horrors of recession on the global economy, and fingers were pointed at shadow banks.

Financial experts bemoaned the improperly regulated shadow banking industry, cautioning and reminding the global economy of how they bait growing economies with their undeniable advantages and their role in the fight against poverty. Then of course, CHINA! In 2013, more than half of all lending in the pork-eating capital of the world came from shadow banks. Relative to their share of the global economic pie, they have the biggest regulatory arbitrage when it comes to shadow banking. Simply put, they spoon-feed shadow banks. This is done by restricting banks from lending to specific industries and offering higher returns on savings. That technically opens the backdoor of the restriction to banks: it encourages them to lend more to the shadow banks. Because shadow banks are not properly regulated, losses are prevalent. When that happens, their inability to payback obviously hurts the lending banks. The good news for China though: conventional banks have kicked aside shadow banks and have established themselves as the go-to guys for corporate funding. A laudable achievement, and a huge turnaround from mid 2014.

In Ghana, shadow banks and commercial banks are also complements, but unlike China, these two keep having risky sex. Banks have acknowledged how pleasurable it is to lend to micro-finance and financial institutions are doing it vigorously. As of October 2014, the country had a staggering amount of registered and active MFIs and Financial Institutions: 92 and 7 respectively. Reviewing the list made me realize that most of those I see around and in major markets are not in fact registered, even though they have intimidating signboards with "Company Limited" next to their names. The shadow banking industry in Ghana has "kume preko" interest rates and most accept every electrical appliance common to Ghanaians as collateral. Truth is, they process loans faster (some now give loans in less than 45 minutes), establishing themselves as the go-to guys when individuals are hard-pressed. The paid-up capital required to incorporate a MFI is no child's play, but those who pose the major risks are the new ones or those with little working capital to absorb losses resulting from individuals who default (recovery rate of the industry is still abysmal).

Soon, some will drown and that will cast a shadow on the books of commercial banks who have either lent them money or supported/financed their incorporation. That phenomenon beckons, as the shadow banking industry still remains an improperly regulated one, but the two will keep indulging for a long time until one obviously gives the other an incurable STD.