Inside a Banker's Mind

The other day I had lunch with an old acquaintance, an African banker. I don’t think he would mind if I used his name, but I haven’t asked his permission, so I’ll call him Mr. B.

Mr. B is a good guy. He has worked with his bank to make it very easy for people without a lot of money to open an account and do business with the bank. He is using technology in creative ways, and I love it that lots of people who have never had a bank account before now have a convenient way to get the security and credibility that come with a bank account. And Mr. B is happy because all those people are paying for the service.

Mr. B’s bank has also started opening accounts for Savings Groups, aided by a major international NGO that is using its credibility and influence with the groups to steer them towards the bank. So far, the accounts are used for keeping funds safe, although a lot of groups still say “No thanks, we can manage security ourselves, and anyway, we don’t want to pay your fees”. That’s fine - bank accounts aren’t for everyone.

As we were talking, though, Mr. B asked me a couple of questions that opened a window into the Banker’s Mind, a curious space where things that are obvious to the banker look kind of nuts to me, and the reverse is equally true: some of the things that I take for granted are alien to the Banker’s Mind.

First, he asked me, “Paul, what do you have against wholesale loans to Savings Groups? It seems so convenient to use the group’s savings as a guarantee. Then I can make one loan, and the members can split it up as they like. Isn’t that good for everyone?”

I responded, “Great question!” Now, you will have noticed that these days everyone says “Great question!” whenever anyone asks a question. But - that really was a great question! It’s right at the heart of the SG-banking relationship.

There are so many reasons why wholesale loans to groups are a bad idea that I thought carefully about which I would pick. I decided to go for the risk-benefit mismatch argument: “Not everyone in the group wants to borrow your money, so in effect when you make a group loan, you are asking the grandmother sitting quietly in the corner to guarantee a loan for the young guy who wants to invest in his business. If for some reason he can’t pay back, Grandma loses her savings and finishes her life in poverty.”

Mr. B, to his credit, instantly accepted that. But while we agreed over lunch, I had to wonder how long the bank would hold out against a chance to make money with wholesale loans. Banks, after all, tend to maximize returns in the short run, and wholesale loans will do that. They won’t work in the long run, because the debt burden will grow until the group crumbles. But the process of killing the group with external debt will take two or three years, at least, and in the meantime, profits will flow.

Then Mr. B asked another great question: “Paul,” he said, “What do you think of this idea? If a Savings Group member has saved 100, and his group is keeping its money in my bank, and he needs to borrow 100, wouldn’t it be easier if he just kept his savings in the bank, and borrowed 100 from me? It would be quick and easy to make the loan, since it would have a 100% liquid guarantee.”

My first response simply showed my astonishment: “Why would anyone want to pay you interest, when they could borrow from the group, or use their own funds?!?” Mr. B patiently explained to me that it was good for people to build up a credit history with the bank by borrowing so that they could have more options later, and after all, their rates weren’t very high. The implicit assumption was that of course everyone wanted a long term relationship with a bank. What was wrong with me that I couldn’t see that? 

And this, I thought, was the essence of the fundamental gap between the Banker’s Mind, and the Savings Group mind. The Banker doesn’t really see any future in Savings Groups other than as a way of acquiring clients. SG’s are simply stepping stones to Financial Inclusion, and Financial Inclusion is an income stream for the banker, and there are few markets left to conquer in North America or Europe, so they turn towards Africa and Latin America, all the while thanking their International NGO friends and even donors for bringing them new clients.

I argued that for many people, they were better off with the ease and convenience and flexibility of Savings Groups, and they preferred paying interest to themselves, and the groups not only met most of their needs, they met them better than a bank could. Mr. B looked in my direction, but any connection we had was gone. He couldn’t focus on my face. He looked perplexed. My words made no sense to him - halfway through a pleasant lunch, I had started talking gibberish. His phone rang, he took a call, and when he was done, we talked of other things.

Great article.

Thu, September 4, 2014 | g.kay

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Mon, September 22, 2014 | Debt management company