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The Great Bank Robbery: $30 million gone [The Fiji Times, 30 September 2011]

18/03/2012

What a shock if you saw this headline in the papers:  $30 million gone from banks?

But you won’t see this headline. Because it is not the banks losing the money.

It is only you ordinary savers losing your hard-earned savings every year, quietly, out of sight, and usually out of mind.

Savers lose the difference between the rate of inflation and the savings interest rates the banks choose to give you.

If this year the inflation stays at 7 percent, and the savings interest rate is 1%, then you will lose 6% of your savings in real terms.

Fiji’s current savings deposits of $750 million will, by the end of the year, have lost some $45 million in real terms- at the end of the year, savers will only own $705 millions in real terms.

Who gains?   The banks and their borrowers definitely.

Perhaps FIRCA and government through inflationary increases in tax revenues.

The Inflation Robber
For more than a decade, the banks have been paying less than 1% interest on ordinary savings deposits, while inflation has been above 4% most years.

Since 1988, real interest rates on savings has been negative for 20 of these 23 years.

If you had put $10,000 into a savings account in 1988, the value of your savings would be eroded by 43% to be worth a mere $5,700 today.

Total savings deposits in Fiji have been growing slowly.  Of course, some depositors withdraw some money, but others also keep depositing, and total savings balances have been  more than $600 million in recent years reaching $750 million today.

For the last few years, savers have lost annually between 3% and 6% of the real value of their savings in the bank.  i.e between $18 and $45 millions every year.  Let us just say $30 million gone.

Just like that.  Ordinary people don’t think about it, because all they see are their dollar balances in their bank statements.  Not the real value adjusted for inflation.

So much for the banks’ propaganda about keeping your money “safe”.

Banks and borrowers gain; only savers lose.

   There are three parties directly interested in the savings: the savers, the banks and the borrowers.

First, the borrowers must gain, otherwise they would not borrow. And Fiji’s banks, with caps on lending rates, do not lend to risky clients for risky projects (only FNPF, FDB and recently even RBF, do that, unwisely).

In recent years, many borrowers gained valuable appreciating assets, while paying their loans in ever depreciating dollars.

The second set of beneficiaries are the banks themselves, as their healthy annual profits show.  Their profits are also affected by inflation and devaluation of the Fiji dollar (which reduces the foreign value of their repatriated profits).

Except for the brief period when RBF controls were placed on interest margins (pretty ineffectually at that) the banks have earned healthy profits.

They have not suffered at all, come coups or global crisis.

So the bottom line is: neither the borrowers nor the banks lose money.

The only people who lose out on the use of these hard earned savings, are the owners of the savings.

How unjust!

Why low deposit rates?

   If you ask the banks why are the savings interest rates so low, they will tell you with a benign smile, “aah, you economists should know- it is just the forces of supply and demand in a free competitive market”.

Except that it is not a competitive market.

Our two large banks are too smart to compete with each other on interest rates and charges: they know that would condemn them to a race to the bottom.

They don’t have to form a blatant cartel.  The Big Two know that what is good for the goose will also be good for the gander.

And the small banks are not so stupid as to take on the big banks (aah, BSP may be another matter!).  Small banks are happy enough to “follow the leader” (price leadership).

And helping the banks has been the gross injustice that for decades, every government and Reserve Bank have made sure to impose strict foreign exchange controls on Fiji citizens, whose savings are kept captive in Fiji, for others to use.

(That will be another story: “Whose Money Is It?”).

Financial Literacy Programs: hah!

   It is hilarious how the commercial banks have been trumpeting through their PR marketing that they are trying so hard to teach financial literacy to the unsophisticated poor people of Fiji.

Their idea of financial literacy: learn to give your savings to the banks who will keep it “safe for you” until you want to use it.

Except that they never tell that when you get your savings back years later, a large part will have disappeared because of inflation.

They never teach you: put as much of your savings into time deposits, earning higher interest rates. Do not leave your savings in Savings Accounts, if you can help it.

Our commercial banks may give you a Bonus Savers product with higher interest rates, but withdraw even a dollar, and you lose the higher interest rate on all your balance.  You would think that the higher interest rate would simply apply to the minimum balance easy enough with computerised banking. What a scam.

And how many ads to you see advising savers to move savings to the Bonus Savers accounts?

Increased Fees and Charges, Reduced Services

   Not only are savers denied positive real interest rates on their savings deposits, the banks, charge the poor depositors with every fee they can devise.

Fees for withdrawals; monthly service fees even if they do nothing for you in an account; once they used to even charge you fees for undisturbed accounts- while they gleefully made full use of your money!

The fees and charges now comprise a large part of the banks total revenues.

Once upon a time, it was expected that the banks would cover essential services to depositors out of their interest rate margins.

Once upon a time the commercial banks had branches all over Fiji- all gone now.

No more teaching school children the savings habit through little tin banks.  Why bother.

One bank makes a big hooh hah about its mobile banks taking “banking services” to the villages.  What services?  They certainly are not lending money out there.

They are just siphoning up the large amounts of foreign remittance earnings which in recent years have been making its way to the villages.

Commerce Commission Action

   The Commerce Commission should not waste its scarce resources interfering in competitive market situations, like bakeries or retail pharmacy outlets, where major effort by the Commission will only result in minor gains or even negative results.

But the Commerce Commission is entitled to interfere if they see the exercise of “substantial market power”, as is likely to be the case in Fiji’s commercial banking sector, where the gains of market interference may be substantial.

The Commerce Commission will no doubt take a holistic view of the fees and charges also, when examining by how much savings deposit rates should be increased.

For instance, demanding that banks increase ordinary savings deposit rates to 3% (or somewhere towards the rate of inflation) will no doubt put downward pressure on banks’ profits.

The banks will scream and shout. And try some back-door lobbying, as other powerful companies have.
Raising savings deposit rates would also no doubt tend to raise lending rates and put downward pressure on investment.

But let the borrowers pay, and let the banks ration their loans to the high return borrowers.

Why should our country’s savers, who are already doing a favour to the borrowers and banks, be the only one out of the three, to pay the cost of making the economy grow?

Why should Fiji’s ordinary savers be the only ones left with less money at the end, while the others profit?

Like Oliver Twist, savers should demand from the Commerce Commission Chairman: “Please sir, we want some more”.

And they don’t want porridge either.

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