Micro-lenders ‘no risk’ to banking system?
If microlending is “not seen as a systemic risk to the South African banking system” then why “Moody’s sounds alarm”? (Ethel Hazelhurst, Natal Mercury, Friday June 28).
Maybe it’s not a risk to S.A. commercial banks, but it is a risk to local borrowers and consequently overseas investors, where Moody’s concerns are.
Without assets to secure a loan, high interest subsidizes defaulters, but increases the risk of bankruptcies, which is internally damaging.
It’s politically damaging, because bankruptcies erode the government’s tax base and Moody’s reacts to that by ‘downgrading’ the country to a higher investment risk, so it’s obviously ‘alarmed’ about the 389% increase in unsecured S.A. Loans over the last five years no matter what the Reserve Banks says.
Most European governments and the U.S. have fallen prey to expensive foreign money, are in unrepayable debt situations and borrowing more money to offset interest charges to their citizen’s ‘austerity’ costs – or am I misreading the news?
South Africa has not (yet) reached that state, but the signs are clear:
Most E.U. countries and the U.S. now have Debt-to-GDP ratios over 100%.
So the micro-lenders story appears to me as a media distraction from any focus on our rapidly climbing Debt-to-GDP ratio, now 43% from 39% two years ago and the more than R1Trillion now owed to foreign banks, way above Apartheid-era National Debt levels.
And that’s only the second level of International banking, the first being war debt.
The next level is internal.
Allegations that local commercial banks are involved in the sale of derivatives, especially ‘toxic’ derivatives, must also concern Moody’s.
Toxic means derivatives ‘securitized’ by pooling mortgage debts with less secure, even unrecoverable debts fraudulently labeled ‘Triple-A mortgage-backed securities’.
This practise in the U.S., to which the U.S. Government turned a blind eye, led to the Sub-prime crash in 2008.
The fourth banking level is the usurious exploitation of the poor and middle classes, where lenders outside ‘the system’ operate. The first response to S.A. micro-lenders was the Mzansi debit card (launched in 2008) aimed at the poorest of the poor who were using micro-lenders costing up to 60% of borrowers’ income – high interest subsidising defaulters.
Mzansi (Absa, First National, Meeg, Nedbank, Standard & Postbank) borrowed money from “previously unbankable” people at a miniscule interest rate (0.75%) and lent it out at the going SARB rate to… ‘the rich’.
Mzansi’s minimum transfer charge was R13, a cash withdrawal, R4, which at R17 a month from an average of three million original users, was around R48 million a month, nearly half a billion a year that doubled in the next three years and did not include profits on interest earned by the banks.
Cost? Advertising, an electronic connection to an existing ATM and a plastic card.
Ye Kona, Transact, Access, Easyplan and others have since followed the Mzansi initiative, possibly because, according to the Consultative Group to Assist the Poor (CGAP), Micro Finance Institutions (MFIs) are globally “out-performing the commercial banking sector by more than 50%”, which could be a systemic danger… unless the commercial banks move into the ‘Mzansi’ sector and shut down the Moody’s alarms.
Astonishingly, that’s not enough! All S.A. depositors actually pay banks to lend them their money today – it’s called a ‘deposit charge’ – which, along with all the other bank charges, means depositors see only between 80 and 95% of their income (much more than through microlenders, though), when they used to see a small additional income from interest.
I ‘exposed’ the Mzansi debit card product in the local press in 2009. The story was published as a case study in the Konrad Andenauer Stiftung’s textbook “Manuals of Investigative Journalism” in 2010, and can be read here:
http://www.investigative-journalism-africa.info/?page_id=48 – Click on ‘CHAPTERS’, then click on Chapter Six, Basic Research Tools and scroll down to page 15 “Getting Rich by Helping the Poor”.
A reaction to the consequences of usury – against both the public and government – is summed up here:
“Meanwhile a powerful host of accusers fell with sudden fury on that class which systematically increased its wealth by usury in defiance of a law passed by Caesar the Dictator defining the terms of lending money and of holding estates in Italy, a law long obsolete because the public good is sacrificed to private interest”.
– Publius Gaius Cornelius Tacitus, The Annals of Rome AD 27.
One and a half billion gold Sesterces in Roman government interest-free loans and three years to ‘recover’…
Plus ça change, plus c’est la même chose…
Globalization: The unbearable simplicity of banking.
Briefly, lending is a no-risk, ‘asset-secured’ business, in its simplest form seeing borrowers liable only for the original loan, secured against the borrower’s assets, plus interest.
When the loan is payed back, the bank profits from the interest.
When borrowers default, they yield to the lender whatever securities they’ve put up, normally far exceeding the value of the original loan.
The lender still profits.
Most public loans are mortgages, where the home itself secures the loan.
But over the 20-30 year payback period – his working life – the home buyer often returns more than 100% interest as he pays back at least twice the amount of the original home loan. And he can lose his home at any time, no matter how much he’s paid.
So in the simple lending business, the lender gets his money back, plus interest.
In a default situation, he gets the securities against the loan which he sells off to recover the loan and should profit if he’s correctly valuled those assets.
In the mortgage market, he doubles his money.
This looks like an almost totally win-win situation for the banks.
Depositors paying banks to lend them their money? Just more cream.
More than just arrogant, it seriously begs the question, why such cheap exposure to inevitable publicity?
Or does “that’s just the way it is” have enough power to prevent close examination?
Is there a solution, any solution?
Localize the economy.
Start with Food Security:
Google Preppers, Permaculture, Transitional Cities and follow the links… the neurons of the Global Brain…
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