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Co-operative banks

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In some developing countries there exists a bank-type institution, the village financial service cooperative. It goes by another name, rural bank, in other countries. As the name suggests, these banks are geographic-specific, and small-scale, financial services intermediaries. They are usually member-owned and -controlled co-operatives that provide basic financial services (mainly savings, loans and funds transmission) to members in rural areas not serviced by the mainstream banks.

Another type of co-operative bank is the savings and credit co-operative (SACCO). SACCOs are also known as credit unions in some countries. In a nutshell they are owned and governed by members who have the same common bond: working for the same employer, belonging to the same church, social fraternity or living/working in the same community. They are not-for-profit organizations, but maintain high prudential standards set down by the World Council of Credit Unions (WOCCU).

In some countries the co-operative type banks are formalised under a statute, such as the Co-operative Banks Act in South Africa. In South Africa there are two types of formalised co-operative banks: savings co-operative banks and savings and loans co-operative banks.

The prudential requirements for these banks are the same as for mainstream banks, but the entry level capital requirement is substantially lower.

Dedicated banks

Dedicated banking is a new banking genre (not yet tested in the world but considered in regulation circles) and includes two types of banking intermediaries:

• Core banks

• Narrow banks.

Core banks are those that will specialise in a particular field of banking such as cell phone banking. Narrow banks are those that will take deposits from the public and the funds will be invested in certain restricted, and marketable, securities such as government bonds and treasury bills. As such regulation will be minimal.

In a particular country, a Dedicated Banks Bill has been introduced (not yet promulgated) which provides for the creation of the legislative environment for two dedicated banks to be called:

• Savings banks.

• Savings and loans banks.

The Bill states that a savings bank may:

• .. .accept deposits from the general public;

• make payments on behalf of a client thereof, provided the client has a credit balance in an account with the bank that is sufficient to cover such payments;

• provide trust or custody services to clients;

• open a savings account on behalf of a depositor into which the depositor may deposit money and from which the depositor may withdraw or transfer money.

The Bill also states that the savings bank may only invest money deposited with it in liquid assets (treasury bills and short-term government bonds in the main).

As regards the savings and loans banks, the Bill states that they may conduct the business of a savings bank, and may make loans to individuals and businesses under certain conditions (including concentration and terms of loans).

Discount houses

Discount houses had their genesis in the UK in the 18th century as bill brokers (in trade bills, which later became bankers' acceptances, and treasury bills). They later took on call deposits from banks to fund holdings of these assets and made markets in them.

They emerged in developing countries (first in South Africa in 1961, next Rhodesia / Zimbabwe, Malawi, Zambia, etc.) with unsophisticated financial systems where the banks were enjoying wide margins, which constrained economic development. This situation is usually of concern to governments and to central banks for a number of reasons:

• It reflects a uncompetitive banking environment (in fact banks favour inefficient markets because of the opportunities for profit).

• There is no (or limited) secondary market in securities.

• Both these inhibit the implementation of monetary policy (discount rate cannot be effectively applied and open market operations are difficult to implement).

• Funding by government is not easy and this is reflected in rates that are higher than otherwise would be the case.

• Capital for the productive sector is expensive.

• Foreign investment is not forthcoming.

Thus, discount houses were actively encouraged in the 20th century to assist in the development of developing countries' financial systems. The essence of a discount house is as follows.

• A discount house is registered as a banking institution (banks and discount houses are regarded as banking institutions).

• The Registrar of Banks and the central bank, which requires of them to submit a statement of assets and liabilities on a daily basis, regulate the discount houses.

• Their liabilities are limited to call money from the banks, and certain government departments, and their assets are pledged as collateral for the money (this differs in countries).

• The assets of the discount houses are categorized in terms of term to maturity and limits placed on these categories and sub-categories. For example, there would be no limit on liquid assets, and a 10% limit on securities of longer than 3 years. Within the 90% category there may also be a limit on the holding of bankers' acceptances.

• The discount houses earn a margin between the rate paid for call money from banks and the rates earned on securities held in portfolio.

• The discount houses actively trade their portfolios and act as market makers in these securities, i.e. quote firm buying rates for securities offered and securities in portfolio which are in demand. In this way they make trading profits.

• The discount houses are instrumental in assisting the creation of instruments other than treasury bills (examples are: bankers' acceptances, commercial paper, repurchase agreements and NCDs.

Discount houses usually have unique prudential requirements:

• No cash reserve requirement (motivation being that they do not create credit; they merely hold and trade in credit instruments already issued).

• A reasonable level of borrowings in relation to its capital and reserves. In South Africa it was: (call money + borrowings) / (capital and reserves) < or = to 50.

• Limits on non-liquid assets, for example, 80% short term liquid asset paper and 20% long term paper (government bonds and other non-liquid assets). This requirement essentially is a liquid asset requirement.

An interesting aspect of discount houses is that they, in the process of creating markets and building the financial system, bring about their own demise over time. Because they shrink bank margins, they shrink their own, and are obliged, in order to survive, to intrude on normal banking business. This does not enthrall the banks, making them complain bitterly to the authorities, and eventually the authorities encourage the discount houses to transmute into banks. This happened or is happening in most of the countries that had / has these unique institutions.

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