When we export banking to developing countries, are we providing useful services or financial weapons of mass destruction?
As Greece spent January under threat of a bank run, and excited Athenians chatter about it, the problem with modern banks is illustrated by the word for them: trapezai. This, of course, means table. It predates the use of the Italian word banco – or bench – but describes the same thing.
In ancient societies banks helped money function as a medium of exchange. Money changers sat at their tables in the market place and exchanged coins from foreign cities for those of their home city. The result was increased liquidity.
In the medieval period, the emergence of secretive global banking networks, mapped onto state finance and the wool trade, was a signal that a new function was emerging: banks as lenders, operating at the centre of a commercial economy.
Fast forward to the 21st century and banks have an extra function: they stand at the centre of a global economy where money is invented on spreadsheets, spent via electronic card, and where speculative money transactions each day exceed the size of the global economy.
Two financial initiatives in the first decade of this millennium caught the imagination of the development community. One was M-Pesa, launched in 2007 in Kenya, which allowed people to make payments to each other using their mobile phones and national ID cards. By 2012 it was processing payments equivalent to 31% of GDP.
On the ground the social impact of this sudden access to liquidity was dramatic. In a 2012 qualitative study Danielle White found fisherwomen around Lake Victoria were able to save easier, had dramatically reduced travel needs in order to sell their fish, could remit school fees more predictably, and experienced a changed power relationship with middlemen.
In the end, however, what M-Pesa did for the most successful users was to give them access to the traditional banking sector, not replace it.
A second iconic case study was microcredit in the Indian subcontinent, which began with the Nobel winning Grameen Bank initiative, but sparked a copycat rush into microloans by, effectively, for-profit subprime lenders.
Does microfinance really help poor people?
Real interest rates of 36% to borrowers, together with bank interest rates charged at 13% for the lenders themselves, attracted a rush of private capital, leading to the Andhra Pradesh crisis in 2010. Here, lending to impoverished communities created a classic bubble, ending in high-profile suicide cases and state intervention to restrict lending.
While all the media attention focused on these innovative new channels, less attention was paid on what was flowing through the channels, and in which direction. The answer, of course, is financial profit, which always flows upwards from the poor to the banks, even as positive spillovers happen within the recipient communities themselves.
Ultimately, in a functional capitalism, banks and financial services should exist to mobilise the savings of an emerging middle class into productive industries.
That they no longer do this efficiently in developed world capitalism was one source of the 2008 crisis. Corporations, wary of the power of finance, seek to amass cash mountains, or issue their own paper to the bond markets direct; meanwhile banks go in search of alternative sources of profit, with the result that – at the heart of the neoliberal system – is a finance mechanism prone to sudden liquidity surges (as in Andhra Pradesh) and liquidity crises (Lehman Brothers).
The solution in the developed world has, to date, been to bury bad debt in opaque places, to print money, and to recapitalise banks. Those who hoped that, alongside this, we should see the rise of a diverse, semi-socialised banking sector were dismayed as, for example, the caja de ahorro sector in Spain, and then the Co-operative Bank in the UK, entered crises contingent on mismanagement and their entanglement with politics.
Yet the rise of a diverse finance sector, with mixed ownership, and the re-separation of high risk activities and savings is the only form in which the advanced world banks can revive. And by revival I mean completely free of bailout money, completely free of implicit guarantees by the state, and completely free of the trillions of manufactured money currently shoring up their balance sheets.
For poor countries, where mass access to banking is only starting, it is worth considering how you would design an emergent banking sector if you could start from scratch.
The first lesson of the past ten years is that – as with ancient Greece – for a rural economy at the point of takeoff, liquidity is more important than credit. M-Pesa may not scale everywhere, but its effects in cutting out middlemen and corrupt rake-off practises was dramatic.
The second lesson is: there is no free lunch when it comes to microcredit, the conditions need to be rigorously policed, interest capped, and unscrupulous lenders weeded out.
The third is, the more financialised the economy, the more banks are pushed down the route of maximising financial profit from their retail customers. This game was played adeptly by banks in the UK, even where bank customers had relatively high financial literacy. How much easier will it be to play in the developing world as the new middle class emerges.
Even the tough post-crisis financial stability regulations passed in the UK and the USA do not stipulate the need to pursue a mixed economy of banking. So any attempt merely to import a scaled down version of “macroprudential regulation”, barely solves the power imbalance present when global banks operate in the global south.
The key is to regulate for a mixed economy of banking; to build on the networks, and self-help groups to create a true social lending sector; for the state to foster non-profit banks. And at the macro level for the state to leverage in big finance through the work of development banks.
In the most successful emerging markets – Brazil for example – you can see, though far from perfect, an alternative route to the pure replication of Anglo-Saxon finance.
But the success and stability of the global south finance systems are not in their own hands. Trillions of dollars worth of money from quantitative easing is washing around the globe; with the European Central Bank’s initiative in January we are probably approaching the high point of post-crisis money printing.
But the way that money is withdrawn, in the back half of the decade, and the attendant risk of currency war, could very easily swamp the small banking systems of weak economies in its wake.
The lesson of all finance in the global south is that its success maps onto its social resilience and onto manageable scale. Business conducted across a table – as the ancient Greeks knew – can go wrong, but the results are usually not catastrophic.
Paul Mason is economics editor at Channel 4 News. Follow @paulmasonnews on Twitter.