Money Creation, Credit, and Recovery

By Ashu Felix

In the past, the process of extending credit was that of banks and some micro-finance establishments to encourage customers, but some bankers and financial experts failed to see it as part of creating new funds in the economy. To make things worse, recovery was never the subject of their duties. Money is created only when the full amount of credit is recovered. The full amount should consist of the amount of loan, interest and all additional costs incurred to recover the loan.

Some financial institutions now encourage customers by raising the interest rates on savings above the required ceiling authorised by the monetary authorities. The adversity of their actions could not be over-emphasized if one has to consider the reasons of banking failures.

Financial institutions historically include commercial banks, savings and loans associations, mutual savings banks; credit unions, pension funds, mutual funds, insurance companies and investment banks. For a growing economy, money is required to finance investments and micro-projects to sustain lives.

The process of creating money to finance macro and micro-projects is that of financial institutions that continuously recover the full amount of the credit. Granting loans and financing projects by banks and micro-finance establishments is to help them survive and handle their administrative costs and pay interest on savings. Unfortunately, this is being abused by borrowers who dislike the smooth running of a market for credit to support a deserving economy.

Money Creation

For some street men, creating money simply means printing and issuing fresh paper notes and/or minting and issuing new coins into the economy. This is surprising as economists turn things round to say money is created when FCFA 1 turns to FCFA (1+X) reading the creation of a new XFCFA. In order words FCFA (1+X) minus FCFA 1equals XFCFA.

For example, the introduction of the recent colourful money by the government and monetary authorities is not creating money for development but rather a way of designing and giving the same franc-CFA a new look to help secure its durability and nothing more.

The economist case is that of financial institutions that continue to grant loans to borrowers to introduce new X Francs into the economy that could be used to finance community projects, where the X Francs is the amount of interest realised from the use of 1FCFA, the amount of loan required to finance a project.

Micro-Projects Financing

Traditionally, in processing loan applications or projects, bankers make use of the 5C's - Character of the borrower(s), Capital, Condition (credit and economic conditions), Capacity to borrow and Collateral security pledged for the loan "with the purpose of securing the smooth recovery of the loaned amount plus interest."

In addition to these traditional principles, some bankers are ad hoc psychologists, who try to interpret human behaviour, their qualities and frailties and finally proceed to equate these to the loan demand.

Another possibility is whether the project to be financed is SMART? That is, is the project Specific? Measurable? Appropriate / Acceptable? Realisable over Time? Also, if one has to consider the say of some borrowers that a loan makes them work for the bank then some bankers would find out whether the loan could encourage the borrower to work harder or not?

Perhaps the first point of interest to the banker will be the liquidity need of its financial institution in order to determine its credit potentials. Lending operations are a privilege to banks with excessive idle cash balances from customers' deposits, reserve requirements and the new X francs CFA created by the financial institution.

Recovery

Recovery is just as good as to generate a constant money creation process and permit easy lending procedures and prevent financial institutions from liquidity crisis. Institutions with delinquent loans will have their liquidity tie-up in unpaid loans and interest. With such a situation some institutions would strengthen their credit policies to discourage lending and making it costly. Some recovery measures like counselling the borrowers before granting the loan could be necessary.

Recovery is one of the most difficult tasks for a banker, as most often it would require the services of external legal advisers in cases where the loan repayments could not be settled amicably by the borrower. In such cases the borrowers' loan repayment burden will include the loan amount, interest and all legal charges incurred by the bank in recovering the loan.

Unpaid loans are a loss of money in the economy rendering the economy poor and unable to foster community development. On the other hand, fully recovered loans create money that could be used to sustain a growing economy like ours.

Ashu felix

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