Opinion: Lack of credit creation for a nation leads to its poor implementation of monetary policy and stagnant economic growth

Feb 13, 2022 — Dear readers as I promised in January that I am going to educate the public about credit creation and how our central bank wouldn’t effectively and efficiently manage the current monetary tools they are applying to curb inflation due to the behavior of some of their commercial banks which are wounding this process as a case of Stanbic bank.Let’s begin by example on how Credit Creation by Commercial Banks. 

Introduction

A central bank is the primary source of money supply in an economy through the circulation of currency. It ensures the availability of currency for meeting the transaction needs of an economy and facilitating various economic activities, such as production, distribution, and consumption. However, for this purpose, the central bank needs to depend upon the reserves of commercial banks. These reserves of commercial banks are the secondary source of money supply in an economy. 

The most important function of a commercial bank is the creation of credit. Therefore, money supplied by commercial banks is called credit money. 

Commercial banks create credit by advancing loans and purchasing securities. They lend money to individuals and businesses out of deposits accepted from the public. However, commercial banks cannot use the entire amount of public deposits for lending purposes. They are required to keep a certain amount as a reserve with the central bank for serving the cash requirements of depositors. After keeping the required amount of reserves, commercial banks can lend the remaining portion of public deposits.

Example:

Let us learn the process of credit creation by commercial banks with the help of an example. Suppose you deposit SSP. 10,000 in bank A, which is the primary deposit of the bank. The cash reserve requirement of the central bank is 10%. In such a case, bank A would keep SSP. 1000 as a reserve with the central bank and would use the remaining SSP. 9000 for lending purposes. The bank lends SSP. 9000 to Mr X by opening an account in his name, known as a demand deposit account. However, this is not paid out to Mr X. 

The bank has issued a chequebook to Mr X to withdraw money. Now, Mr X writes a check for SSP. 9000 in favor of Mr Y to settle his earlier debts.

The check is now deposited by Mr Y in bank B. Suppose the cash reserve requirement of the central bank for bank B is 5%. Thus, SSP. 450 (5% of 9000) will be kept as a  reserve and the remaining balance, SSP. 8550, would be used for lending purposes by bank B. Thus, this process of deposits and credit creation continues as long the commercial bank is in operation.

The Connection between Credit and Economic Growth 

Credit creation. It is a matter of common knowledge that any economy, no matter how advanced, cannot develop in the absence of credit. 

Looking back upon the transition towards a market economy, we realize that this has negatively affected credit policies. In the absence of credits, the South Sudan economy cannot be revitalized with currency and cannot set off new projects. Similarly, we cannot neglect the loss of trust in the national currency, along with the development.  The economic and financial crisis that debuted in 2016 was based on an under-appreciation of existing cash. 

growth. The moment liquidities that fuelled this growth disappeared, a strong readjustment of all prices of assets took place, that is to say, recession set in. The banking sector, through the very nature of its activities, manifests trust towards certain endeavors by granting them credits, which leads to the realignment of the relative prices of assets. The re-allotting of resources among assets through the realignment of prices represents the very basis of the economic growth of the new economic cycle.

Up to date wealth, nations experienced accelerated growth, mainly due to easy access to credit, as well due to the rise in income. To put it differently, two factors led to a rise in the easy and cheap access to external financing, and internal growth, this being strongly connected to a re-evaluation of economic risks. Professor Nicolae Danila argues that to continue the credit creation of viable clients and to minimize the risks it has assumed. 

 It is not difficult to comprehend the concrete way in which the growth of credit influences economic growth. 

When credit grows, consumers can borrow and spend more, and enterprises can borrow and invest more. 

A rise in consumption and investments create jobs and lead to a growth in both income and profit. Furthermore, the expansion of credit influences also the price of assets, thereby increasing their economic value. The rise of asset prices offers the owner the chance to borrow more, due to the increase in wealth. This cycle of credit expansion leads to increased costs, investments, the creation of new jobs, to prosperity.

Now having understood the power of credit creation by commercial banks and you again go ahead as regulator and issue a license to a bank that doesn’t offer to save and lend accounts as the basis of credit creation which can empower your economy or you are simply participating in the stagnant economic growth of your own.

 Let me be specific, this bank called Stanbic bank Kenya limit was given an official license to operate as a bank in 2012 and the bank managed to collect huge fees and commissions yet they don’t support your economic growth by offering saving and lending accounts.

 In banking, withdrawal is the destruction of an economy. Why do you allow such a bank to destroy your economy?   Again you allow them to bank on the only productive sector of your economy which is oil and gas yet they participate in the destruction of your economy. Not only that, the government allows them to collect taxes on behalf of the government as they are getting their commission yet they participate in destroying your economy in which the collection of taxes was supposed to be given to local banks or banks that are fully subsidiaries as a way of supporting your economy.  They further bank the whole non-government organization operating in your country and they don’t facilitate any credit creation process. 

Why does my government fail to understand the basics of economic growth? The whole world is fighting an economic war and here you allow your resources to be repatriated and developed in another country.  How long should you continue to operate like we are not an independent country? where is the consumer’s protection policy if you allow your people to bank with a bank that only collects commission and fees? What is the purpose of your cash reserve ratio requirements here?  

What will be the value of your monetary policy in the country if you can allow such a bank to operate for 10 years without helping to grow your economy. Profit is being repatriated every year to another country’s economy yet you find it difficult to pay your civil servants. Government is not everything to develop individuals and businesses but the private sector can assist the government to accelerate the development of any country if the central bank has powers to monitor the monetising process of her economy. If you don’t support your local businesses which are being denied by Stanbic bank yet they bank your most productive sector. Remember Stanbic bank is operating as a corporate bank in your economy yet they don’t finance any development projects in your country but they contribute to the destruction of your economy by aiding cash withdrawal to get huge fees and commissions. The pension funds they collect from their customers and employees are being invested in Kenya. Can your supervisory team check the products/services that Stanbic bank is offering and what they offer to other countries they are operating in?  

They nearly killed your first-ever commercial bank which is the Nile commercial bank and they destroy your economy silently at your watch.  

Off-site Banking Supervision works on developing an effective risk-based approach that continuously monitors different types and developments of risks facing banks while assessing the extent to which banks are affected by current events. Furthermore, it works on enhancing the early warning system, which allows the Central Bank to take proactive measures to ensure the safety and soundness of the Banking Sector.

The main source of information is the financial and prudential returns periodically received from banks, along with other periodic statements such as Central Credit Registry – CCR reports and shareholders statements. These periodic returns and statements could be supplemented by further information requested from banks on an ad-hoc basis if deemed necessary while On-site banking supervision

An on-site examination, this phase includes the examination of the bank’s activities, the internal control system, the management information system, the bank’s strategy evaluation and the risks resulting from it and the bank’s capability to address and manage these risks.

I will just give you the highlight of what the central bank in any country is supposed to do and the areas they are looking for during offsite and onsite supervision. How can we develop our country if our commercial banks behave like Stanbic banks?

In conclusion, can we own South Sudan by asking ourselves what can we do to develop south Sudan not what can we get from south Sudan

So God helps South Sudan!!!

Regard 

Compiled by professional monetarists.