Saturday, April 24, 2010

Banking on Defeat

Let’s say that an enterprising Malian farmer named Amadou invested his best field, his strongest work ox, that ox’s richest fertilizer, 1,000 francs worth of seeds, 5,000 worth of pesticides and two months of his family’s labor towards the cultivation of cotton. Let’s say that this year Amadou’s cotton crop was quite successful and he was able to sell 100 kilograms of raw cotton to the local textile mill representative, netting him the sum total of 20,000 CFA. Amadou was smart and collected all of the cotton seeds, his tools are all in good shape, and his work ox looks healthy enough to work the cotton fields next year – he has no need to put any revenues back into the operation costs of his cotton business. His 20,000 CFA of revenues this year translates into pure profits. And let’s say that Amadou is really, really responsible and he wants to save all of his money so that he can have something to fall back in case of an emergency, and he hopes to one day buy a millet-grinding machine to give his family another source of income.

The unfortunate fact of the matter is that Amadou the farmer doesn’t have any good places to put his money. What looks like the safest option might be to stuff his cash in a tin can and to hide it behind the loose brick in his one-room mud hut. So Amadou hides his 20,000 francs behind the loose brick in his hut and resolves to not touch it unless he needs to pay for medical bills. But maybe a few weeks later, Amadou’s shady younger brother Mamadou sneaks inside Amadou’s hut, and since he knows the hiding space he pulls out the brick, opens the can and steals 5,000 to buy cigarettes and whiskey. And over the next few months a termite colony invades the mud bricks in Amadou’s hut, the termites find the cavity comprising his hiding spot, and happily munch away at the remainder of the paper bills. When Amadou has to send his wife to the clinic months later, he opens up his secret stash and all he has to show for his cotton harvest is a rusty can of termite poop.

What’s really tragic is that in countries like Mali, there really aren’t any better options for Amadou to manage his savings. At least if he puts his money in a tin can behind a brick in his hut, there’s only a chance that his savings will be stolen or destroyed. If he were to employ any of the other options available, that would be all but guaranteed.

If Amadou were interested in a more aggressive, growth-oriented investment strategy, he could do what most Malian men do and put his money on the horses. Yes, even though there are no race tracks in Mali, the inevitable has occurred and a group of exploitative parasites that calls itself PMU found a way to enable this largely illiterate, innumerate culture to bet on horse-racing in France. All they had to do was set up booths in every major city and hire local agents to distribute pamphlets and collect wagers in the villages, and most importantly to spread the word that people could win big money. I've been told by numerous investors in the horse market that "There is a man around here who won so much money from the horses that now he'll never have to work again!" - none of these investors know who this man is or where he lives, but they insist that he exists. So now every week when PMU distributes the next lineup of horses, the barely-numerate men of the village sit together and closely examine the odds as though they were stock quotes in The Wall Street Journal.

Since he bets on the horses every week, I asked an inveterate gambler named Alexandre – a poor subsistence farmer with 3 wives and 19 children – how much he’s actually won this year.

“This one time, my horse came in first place and I won 1,000 francs!”

“… Yes, but how much have you bet on all the other horses that didn’t win?”

“This year, I have put 8,400 francs on the horses.”

“…So you lost 7,400 francs.”

“But I won 1,000 francs!”

Given the performance of more reputable investment houses like Goldman Sachs as of late, one could argue that college-educated American investors are managing their money no more prudently than PMU’s illiterate, innumerate clients. The greatest difference between Goldman Sachs and PMU is that wagering with the more respectable American investment house carries much less risk, for if the value of Chrysler stock plummets then its shareholders only lose wealth if they sell their stock at that lower value and they can always wait it out until Chrysler stock rises again – but if Amadou puts his money on “Silver Bullet” and his horse comes in 7th place, then his money is unambiguously lost. Furthermore, there is hardly anyone in America who wagers on the stock market who doesn’t also have money sitting in the bank, accumulating interest at a slow and steady rate.

So why don’t Malians put their savings in a bank account? There are even banks in rural towns like Sanadougou – which has a two-room Kafo Jiginew office open on market every sixth day. Kafo Jiginew is a real bank in which men and women can open accounts, make deposits, take out withdrawals and even apply for small loans. But the money put in an account at Kafo Jiginew does not accumulate interest. In fact, this bank charges each holder of an account 5,000 francs (~ $10) every quarter. So if Amadou were to open up an account at Kafo Jiginew and deposit the 20,000 worth of profits from his cotton harvest, he better withdraw it all within a few months because by this time next year the bank will have deducted it all. That is why rural Malian villagers do not ever put their savings in a bank, and if they do have an account in a formal bank, it is simply for the purpose of taking out loans and repaying their debts.

Banking is only slightly better in the cities, where people can choose from opening an account at either Kafo Jiginew or la Banque de Developpement du Mali, la Banque Nationale de Developpement Agricole, EcoBank or Bank of Africa. Though urban banking is quite different, for people’s livelihoods tend to be based less on good production than on selling goods and services; with less people who need to buy new seeds and tools every planting season, urban banks rely less on lending to make a profitable business. Generally, the only people who have accounts at the urban banks are functionnaires who get paid via monthly, directly-deposited salaries; police officers, teachers, doctors, NGO personnel, those in management positions at textile mills, etc. And since there is more communications infrastructure in the cities, urban banks offer a wider range of services, most importantly in that they have access to computers and the Internet which allow clients to wire transfers to family-members in other cities and receive remittances from family-members abroad.

Urban banks are also more expensive; they charge 10,000 francs just to open an account, and another 1,500 francs just to keep the account open every month. Like Amadou’s money at Kafo Jiginew, the funds that I leave untouched in my BNDA account accrue no interest. Even in the supposedly more sophisticated cities, banking is a losing endeavor. In truth, these banks truly function less like banks in the Western sense of the term and more like those establishments where illegal immigrants go to cash checks and wire remittances via Western Union – they charge predatory fees for minimal services which a real bank would offer for free, and the only reason why people keep throwing money at these institutions is that they have nowhere else to go. Since they exercise a monopoly over the money market¸ these so-called banks do not even have to conduct the development-oriented lending which they were originally commissioned to do in order to remain profitable enterprises – they are making a killing by providing services that can be done just as efficiently by an ATM.

A fundamental departure from Kafo Jiginew is that some urban banks allow holders of a checking account to open up une caisse d’épargne; a savings account. At BDM, so long as an account-holder can put away 50,000 francs (~$100) into a separate savings account which they cannot touch for a year, they can earn 15 percent interest. So if Pascal the teacher can put away the exact minimum for a savings account, after a year he can accrue an extra 7,500 francs (~$15) and feel like a big winner. Compared to prevailing interest rates in American banks, this might sound too good to be true – because it is.

You see, no one can hold une caisse d’épargne for a year without also having a checking account, and though the savings account might have accrued 7,500 francs, over that same amount of time BDM will have charged Pascal 18,000 francs simply for keeping a checking account open. The effective benefit to Pascal of opening up a savings account is that instead of losing 18,000 CFA in convenience charges, he only loses 10,500 CFA. In fact, Pascal would have to be able to put 120,000 CFA (~$240) away in une caisse d’épargne for a whole year just in order to accrue enough interest so that his participation in the banking sector can break even. Therefore, in this country where per capita income hovers around 200,000 CFA (~$400), the mere act of holding a bank account can only serve as a profitable endeavor for the wealthy elite. And still, the despots of General Traoré’s kleptomaniac regime decided that it would be in their interest to tuck their pillaging away in Swiss banks…

As much as individual adults are responsible for their own fiscal solvency, it is hard to blame individuals for being bankrupt in this country where the banks are not facilitating sound money management. The banks in Mali as they now stand provide only disincentives for the rural peasantry, the urban poor and the middle class to save their money, and even if they can’t do math they understand that keep cashing around the house will make it liable to getting lost, destroyed or stolen – so they feel compelled to spend it as quickly as possible on fancy clothing and electronics they can’t afford, and before you know it they’re broke.

And as perverse as it is, the worse the people are at managing their money, the better it is for the bank’s short-term profits. In failing to offer better financial products, the banks are keeping the standard of this living in this country stuck in abject misery, because without savings people cannot pay for their children’s school fees and without savings they cannot pay their medical bills – unless of course they pay with borrowed money. And since the banks do not allow private individuals to collect interest in savings accounts, the only way for enterprising individuals to start or expand a business is by taking out loans and going into debt to – of course – those very same banks.

The fact that we in the developed West can so easily save our money, accumulate capital and invest it as we choose is what drives our relatively-thriving market economies. Conversely, the Malian banks’ collective failure to offer bona fide savings accounts to the middle class, the urban poor and the vast rural peasantry is more than just a burden on those individual consumers – it is one of the reasons why the economy of Mali is suffering from one of the weakest growth rates of any country in the world. Especially when you consider that Kafo Jiginew, la Banque Nationale de Developpement Agricole, la Banque de Developpement du Mali were established for the explicit purpose of offering financial services to stimulate the agricultural sector, the fact that these banks are actually discouraging small-scale farmers from saving is decidedly backwards.

Until Malian banks offer savings accounts that appreciate interest greater than the cost of merely keeping a bank account open, or until they eliminate outright their service fees which now make banking such a losing operation, individual Malians are never going to have any reason to save their money, capital will remain painfully scarce, and entrepreneurs will continue to be shut out from the investment they need to make this economy grow. Until they start offering modern financial products and reform the way they do business in a way that encourages private savings, the Malian banking system will continue to retard this country’s economic development.


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