Monday, August 10, 2009

Profetha, banks are not lending because...

A bank borrows from A and lends to B. The borrowing bit is called deposits and the lending bit is called loans. If it borrows from the raia, a bank rarely pays anything to borrow this cash, but will charge the same raia a considerable premium for lending to him/her. If it has borrow from other banks or other companies, it may have to pay something for the deposits. It can also borrow from the CBK, but its not called lender of the last resort for nothing. It'll sometimes demand explanations or a premium.

Simple maths will tell you that it makes a higher margin if it can borrow from the raia. Even more if it can lend back the same to that raia or his/er ilk.

Alas, we have times of plenty and times of scarcity. In times of scarcity, the bank can't borrow from the raia. It thus needs to pay to more to entice another raia or other entities to part with their cash. The other side of the equation is that the broke raia doesn't keep his/er loan repayments. The bank discovers things are thick. It decides that'll only lend to the select few who ordinarily don't to borrow anyway.

CBK wakes up and realises things are not well and its whole system is afire. Reducing the rates it charges as lender of last resort has no impact.

Professor that is where things are. Economy has no electricity to power businesses or consumers. Basic necessities are now luxuries such as flowing water and even food in some cases. It'd make more sense to have a word with the man up the hill...

3 comments:

Ssembonge said...

The electricity and water rationing is bound to decrease the GDP substantially.

chegepreneur said...

I totally agree. The power & water rationing will decrease the GDP. The effects of the MAU encrouchment will be long term on our countrys economy if nothing is done about it.

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