Easy money

In the unlikely event that my children ever ask me for my advice on the best way to become wealthy, my answer is simple: establish a bank in East Africa! Banks here are astonishingly profitable, consistently earning super-profits for their shareholders and super-salaries for their managers.

Now that the financial reporting season is over (and Kenya figures are available from blogger Bankelele if you are interested), the full extent of bank profitability has been revealed. Here are some simple figures, averaged across 5 representative banks in Kenya and Uganda:

Interest rate paid to depositors 2.7%
Interest rate charged to borrowers 18.3%
Return on capital invested 36.4%

Nice work if you can get it.

Years ago, when I was the Financial Controller at Tanganyika Wattle Company in SW Tanzania, I used to lead finance seminars for senior and middle management, focusing on company performance. These sessions were, more often than not, turbid affairs as we turned the pages of the business and divisional accounts, discussing budget variances, stock levels, costs of production and unit costs.... but one day, in desperation at the thought of another page-turning, painful and tedious review, I decided to do something different: I asked the managers present "Who owns this business?" This was in the days when stakeholder capitalism was on the agenda: business was not just supposed to be about its shareholders but also its different stakeholders: employees, suppliers, customers, communities and anyone else with an interest in an organisation's performance. After a brief silence, someone ventured the answer "CDC" (the 100% shareholder). "You're right." I said "Legally, CDC is the owner. But who else owns this business?" A lengthy silence followed. "You do." I said. This business is your past, present and future. You live here, with your families. If it fails, who loses? CDC does, but it's a big organisation. Who really loses?".

After that, we had a much livelier discussion than usual, focused more on the future than the past.

The great tragedy of capitalism as a form of organisation is that it diminishes the importance of society and promotes the culture of the individual. Businesses have incalculable numbers of intersections and relationships which go unrecognised and unrewarded. This, of course, is why banks and other huge organisations cannot be allowed to fail. Their connections and obligations to depositors and borrowers, suppliers and customers are so critical to society that the consequences of failure are unthinkable: yet we have allowed a system to develop that attaches no value, attributes no reward, and assigns few rights to legitimate stakeholders beyond shareholders, boards of directors and senior management.

The latest East African banking results are indicative of the skewed rewards to capital. Depositors (who entrust their hard-earned cash with a bank for safe-keeping) receive a return 10 times lower than shareholders. While it is true to say that the depositor's risk is lower than the shareholder's, by any standards, it is difficult to regard this as an equitable risk-sharing arrangement. Indeed, it exemplifies the gross imbalance in interests which is so deeply ingrained and entrenched in modern society.

Once upon a time, there were alternative forms of organisation: mutual societies, building societies, co-operatives, credit unions, but these have, by and large, been crowded out in the capital jungle, unable to withstand the fast-growing stems of short-term greed. So few alternatives to the privately-owned bank. So few alternatives to rampant capitalism and the culture of greed.

I hope my children don't ask me the best way to become wealthy.