Everyone can have money: enough and legitimately

Germany’s public banks are a model worth adopting or adapting by the World Bank/IMF, impoverished countries like ours.

Sometimes experts have been responsible for our troubles, such as theoretical economists. Another culprit are banks. If there is yawning inequality, it is in large part due to the prevalent money and banking system, which most people don’t understand nor try to, thinking it’s too difficult and best left to the ‘experts’. The problem with experts is that most don’t want to explain it because the nonsensical mystery that banks have surrounded themselves with, keeps unjust (some would say dishonest) systems in place.

The subject is simple enough to be introduced in high school, when students can start practising exercises around it. It is, in fact, imperative that anyone who earns or spends money understands the money and banking system so that they realise how those with limited or no access to credit, are being unlawfully deprived of their rights. Most money is no longer necessarily represented by gold or any other precious commodity, and yet people don’t wonder how paper or intangible electronic money can buy anything in any amount — if one has it.

The birth of Pakistan didn’t come with a bank of its own (they had to ask a private one to come to the rescue). What with the confusion and upheavals accompanying partition, the currencies of the newly-independent countries didn’t get their true worth. The US had almost unilaterally decided that the World Bank/IMF would determine exchange rates for trade and related matters for all countries outside the Soviet camp. Someone had to do the job, but the rupee, like other South currencies, was given a worth created by colonial values, not what it should have been.

People are supposed to learn over time from experience. But there is no indication that it happened here. Banking applications have been as narrow as our economic planning. The corresponding budgets saw the economy only through elitist and middle class — and profiteering — eyes. Lack of credit sans onerous interest without which micro-economies cannot grow into the mainstream, were invisible to them. Much later, subsequent elected governments had only token or ill-conceived schemes to offer that smacked of patronage, and trickle-down that didn’t.

Even micro-finance came extremely late, had limited impact as it couldn’t progress beyond small loans, yet carried high interest, and couldn’t raise most borrowers to the small entrepreneurship level. After that the bankers seemed to stop thinking.

Yet, there are long-established systems that continue to benefit all of society in some countries. The most resoundingly successful, but least known, started a couple of hundred years ago when concerned merchants, business personnel and academics set up a bank in Hamburg, Germany to help the poor with their tiny savings to start small businesses. Their example was emulated in other cities. In another 70 years, savings banks set up by city municipalities became the way to alleviate poverty. These are the ‘sparkassen’ municipal savings banks that were set up to extend services to the economically less developed areas. Their operations are restricted to the city or area they are located in. They have local shareholders and are locally managed. That way, the investments and profits stay in the area and can’t be siphoned off elsewhere. It could be a big bank in a big city or a small one in a village. Today, there are over 400 ‘sparkassen’ in Germany with some 16,000 branches employing a quarter of million people and serving over 50 million customers.

After World War II, Germany’s regional ‘landesbanks’ helped to break into foreign markets. Indeed, the landesbanken are central to German economic policy, focusing on loans to small-to-medium size businesses, including for research and development. They are also central administrators for the municipally-owned savings or ‘sparkassen’, in their area that come under them.  An umbrella organisation, the German Savings Banks Association created in 1924, coordinates and represents all member banks at all levels. About half the total assets of the German banking system are in the public sector.

German public banks are owned directly or indirectly by the federal government, or administrative districts or municipalities. They make profits as commercial banks do, but only by working for the public interest, so their profits are lower, an alien concept for today’s big, predatory banks. As one blogger describes: “Because of the landesbanken, small firms in Germany have as much access to capital as large firms; there are no economies of scale in finance. This also means that workers in the small business sector earn the same wages as those in big corporations, have the same skills and training, and are just as productive.”

This enviable state of affairs is quite contrary to the situation in Pakistan and most other countries where skills and earnings depend on the size of the company. Public banks, serving right down to the smallest entrepreneur, have made Germany an economic powerhouse to reckon with. For the same reason, it is resented by private banks because they can’t stand the competition.

Even the IMF demands that the German public banks be privatised because of so-called “inefficiencies”. It is a very suspect condemnation for socially benefiting citizens and the continued prosperity that Germany has known to date. Because the public banks did not indulge in derivatives and other financial gambling, Germany was left unscathed by the crash of 2008. When private banks withdrew their funds to speculate with, it was the landesbanken and sparkassen that kept the cash flowing for locals. But then, the demand for privatisation comes from an international lender notorious for debt-trapping countries. Even the corporate and mainstream media have gone on the offensive, the motive being private banks wanting the public banks’ share, now that the former have lost almost everything else. Germany’s public banks are a model worth adopting or adapting by the World Bank/IMF impoverished countries. Pakistan’s decision-makers must face the fact that our financial and economic woes can never be solved by these predatory lenders; they can only get compounded. A moratorium is more in order. Of course, the system needs transparency and a modicum of almost-forgotten honesty. But a start must be attempted at some point in time.

Published in The Express Tribune, September 15^th, 2012.