Ideas & Debate

You want to borrow, try running a bank

bank

A large group of banking industry arm-chair observers forget or obstinately choose to ignore that banks use customer deposits to lend to customers. PHOTO | SHUTTERSTOCK

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Summary

  • The bank must at all times give the impression, real and perceived, that it is balancing its acceptance of deposits and lending of loans responsibly while taking the hit on its income when the latter doesn’t go so well.

I had the honour and privilege of working with the late Ali Mufuruki, the Tanzanian gentleman of entrepreneurial distinction who had made his mark within the region as a brilliant board director and consummate chairman.

Ali did not suffer fools gladly and hated to see contributors at board meetings — be they management or other board directors — waffle about a point that could succinctly be made in one sentence particularly where that one sentence required the contributor to start with “I own up to the fact that…”

He had an amazing capacity to store random data about random industries in random African countries, and I watched him churn out performance numbers about a particular industry in South Africa during a discussion on how that industry was performing in Tanzania.

This was after the management of the company had attempted to tell the board why it was not going to be possible to do one thing or the other. That discussion was shut down thereafter with a pithy remark from Ali, “Go and do your homework before you come back to tell us how we can’t do something!”

But my favourite memory of Ali was in our work together as faculty in a corporate governance programme for board chairmen in the East African region. Having been a board chairman himself of many institutions within both the public and private sector, he had a treasure trove of experiences in dealing with government and multinational corporations as shareholders and gave wonderful counsel on how to navigate the minefield that invariably arises when shareholder interests are not aligned.

His most memorable experience as a board chair that he liked to draw on was as the inaugural chairman for Air Tanzania’s joint venture with South African Airways in 2002. The airline eventually folded in 2007 due to various reasons which were in the public media glare. But Ali, with his typical dry wit, opined to the class thus: “Everybody had an opinion about what was going wrong with the airline. Even a fisherman in Mwanza, who had never boarded an airplane, talked loudly about what the board and management were doing wrong!”

I was reminded about this statement last week after I wrote in last Monday’s opinion piece about how the Kenyan banking industry was taking serious income statement flak for the bad loan performance arising from the Covid-19 pandemic’s effect on the economy.

A social media commentator thought that my misplaced praise for the role the banking industry was taking in absorbing the economic downturn was bizarre at best, and sarcastically asked why we should be congratulating banks for taking extra provisions even as the corona repayment waivers come to an end and the entire interest waiver falls due.

Let me start by confessing that I am a dyed in the wool (former) banker. As a former banker, I am used to vilification by the general population who hates how banks make billions of shillings in profit on the back of poor service in some cases, erroneous debits to accounts that take months to be refunded, inexplicable bank charges and customer service agents who bounce client issues around the bank longer than a Wimbledon men’s tennis final match.

Those stories get shouted from the rooftops louder than the stories of growth of small businesses that got a loan to finance purchase of raw materials that helped scale up the business, or working capital that helped bridge cash flows between when goods were sold and when the buyers would pay. Or banks that lent to schools to help them add classrooms and laboratories or dormitories which provided a better learning environment and academic excellence for the students enrolled there. But more importantly, is a large group of banking industry arm-chair observers who forget or obstinately choose to ignore that banks use customer deposits to lend to customers.

They ignore the fact that banks have a regulatory responsibility to use those deposits judiciously, which responsibility is buttressed by the amount of capital that a bank is required to hold so as to leverage on the use of those deposits and, consequently, the loans that the bank can make.

All the bank charges that are levied on customer deposits and transactions plus the interest earned on the loans net of costs add to the bank’s bottom line profit. But it is those same profits against which provisions for bad loans are made.

The customer deposits remain untouched because, and-please-read-this-slowly, they belong to the customer. The bank must at all times give the impression, real and perceived, that it is balancing its acceptance of deposits and lending of loans responsibly while taking the hit on its income when the latter doesn’t go so well.

So yes, repayment waivers must come to an end as all good parties do because the party room cleanup has to start. And sadly everyone has to roll up their sleeves, including the unfortunate borrowers, and get dirty doing it.

[email protected] Twitter: @carolmusyoka