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Commercial Banking in East Africa, 1950–1963

  • Holger L. Engberg

Extract

The monetary evolution in the less developed countries in recent years has led to renewed interest in the functions of financial institutions, particularly in the potential contribution of commercial banks to economic growth. Since many of the developing countries have inherited banks and banking techniques from highly industrialised countries in Europe the question has been asked whether these institutions are capable of performing adequately the varied functions that the growth-conscious new nations now expect of them.

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Page 176 note 1 Greaves, I. C., Colonial Monetary Conditions, Colonial Research Studies No. 10 (London, 1953), and by the same author, ‘The Sterling Balances of Colonial Territories,’ in The Economic Journal (London), LXI, 06 1951.

Page 176 note 2 Hazlewood, A., ‘Sterling Balances and the Colonial Currency System,’ in The Economic Journal, LXII, 12 1952. Comment by I. C. Greaves, ibid. LXIII, December 1953.

Page 176 note 3 Newlyn, W. T., ‘The Colonial Empire,’ in Banking in the British Commonwealth, edited by Sayers, R. S. (Oxford, 1952).

Page 176 note 4 Newlyn, W. T. and Rowan, D. C., Money and Banking in British Colonial Africa (London, 1954).

Page 176 note 5 Mead, Donald C., ‘Monetary Analysis in an Underdeveloped Economy: a case study of the East African territories,’ in Yale Economic Essays (New Haven), III, I, Spring 1963.

Page 176 note 6 Blumenthal, Erwin, The Present Monetary System and Its Future. Report to the Government of Tanganyika (Dar es Salaam, 1963).

Page 176 note 7 McWilliam, M. D., ‘Is There a Case for an East African Central Bank?,’ in East African Economics Review (Nairobi), v, 2, 01 1959.

Page 176 note 8 Loynes, J. B., ‘From Currency Board to Central Bank,’ in East African Economics Review, VII, 2, 12 1960. Also by the same author, ‘From Currency to Central Bank–Some Further Thoughts’, an address to the Economics Club of Kenya, Nairobi, 16 May 1963 (mimeographed).

Page 176 note 9 McWilliam, M. D., ‘Banking in Kenya, 1950–1960’, in East African Economics Review, IX, 1, 06 1962.

Page 177 note 1 The discussion is conducted in terms of exports and imports, but it should be noticed that invisible items in the East African balance of international payments represent a growing proportion of the current account. Thus a substantial amount of foreign exchange has been earned in connexion with the presence of British military forces, and interest and dividend payments abroad constitute an important use of foreign exchange. The behaviour of the capital accounts, including foreign aid, should also be taken into consideration. See East African Statistical Department, Estimate of Balance of Payments 1959, 1960, and 1961 (Nairobi, 1962), and later figures published in the quarterly Economic and Statistical Review (Nairobi).

Page 178 note 1 The multiplier can for our purpose be defined as the reciprocal of the sum of the marginal savings ratio and the marginal ratio of imports to income. The higher the marginal savings and import ratios, the lower the multiplier.

Page 179 note 1 The data should be used with caution, particularly for the gross domestic product, which is essentially an estimate. It would have been desirable to have used net national income in the table, but it is not yet possible to make allowance for fixed capital consumed during each period on the basis of the East African national accounts.

Page 179 note 2 Lary, Hal B., Problems of the United States as World Trader and Banker (New York, 1963), p. 104.

Page 179 note 3 This ‘marginal propensity to import’ averaged about 36 for East Africa over the period 1950–63. This means that, on the average, an increase in national income of £100 would result in an increase in imports of £36. However, such an average figure is not very useful for policy-makers, since it disguises substantial year-to-year shifts.

Page 180 note 1 Figures for the gross domestic product, imports, and exports represent annual flows; money supply figures refer to 30 June each year. (—) denotes a change of less than 1%. Sources: East African Statistical Department, Quarterly Economic and Statistical Review (until 1961), and Economic and Statistical Review (quarterly, since 1961). Also, East African Currency Board, Annual Reports (Nairobi).

Page 180 note 2 G.D.P. of the monetary economy at factor cost, and at current prices.

Page 180 note 3 Exports include re-exports and gold exports.

Page 180 note 4 Money supply is defined as the sum of cash with the public (currency in circulation minus cash in vault at banks) and demand deposits of banks in East Africa.

Page 181 note 1 India, for example, has followed a pattern similar to East Africa. See Sethi, J. D., Problems of Monetary Policy in an Underdeveloped Country (New York, Asia Publishing House, 1961), ch. 1.

Page 181 note 2 Regional redistribution of income favouring the low-income, high-currency-using areas was also found to be a major factor in the increased use of currency in the United States from 1939 to the early 1950's. from 1939 to the early 1950's. See McDonald, Stephen L., ‘Some Factors Affecting the Increased Relative Use of Currency Since 1939’, in The Journal of Finance (New York), XI, 3, 09 1956. Also Cagan, Phillip D., ‘The Demand for Currency Relative to the Total Money Supply,’ in The Journal of Political Economy (Chicago), LXVI, 4, 08 1958.

Page 182 note 1 Kenya, Uganda, and Tanzania, excluding currency circulating in certain occupied territories and in Ethiopia (1950–1), and in Aden. Sources: as for Table 1.

Page 182 note 2 Cash with the public is currency in circulation minus cash in vault at banks.

Page 182 note 3 Banks in East Africa only; government deposits included.

Page 182 note 4 International Monetary Fund, International Financial Statistics (Washington), XVII, 11, 11 1964, and Central Bank of Nigeria, Economic and Financial Review (Lagos), II, 1, 06 1964. Figures represent four-year averages.

Page 182 note 5 Nevin, Edward, Capital Funds in Underdeveloped Countries (New York, 1961), p. 2, argues to the contrary.

Page 183 note 1 See, for example, Roosa, Robert V., Federal Reserve Operations in the Money and Government Securities Markets (Federal Reserve Bank of New York, 1956), pp. 70–1. See also Jucker-Fleetwood, Erin E., Money and Finance in Africa (London, 1964), pp. 7183 and 200–10.

Page 184 note 1 Sources: East African Statistical Department, Quarterly Economic and Statistical Review (until 1961), and Economic and Statistical Review (quarterly, since 1960).

Page 184 note 2 Annual averages of quarterly figures computed on the basis of index numbers published by the East African Statistical Department.

Page 184 note 3 Annual averages of quarterly figures.

Page 184 note 4 Debits to demand deposits divided by the volume of demand deposits.

Page 184 note 5 Gross domestic product (see Table I) divided by the money supply.

Page 184 note 6 The fiduciary issue represents that part of the local currency which is not backed in full by sterling assets, i.e. currency and (usually U.K.) government securities. Under the original currency-board system all local currency was issued only in exchange for sterling. The East African Currency Board was granted authority to purchase local government securities in 1955 (see the Board's, Report for 1955, p. 11 and Appendix 11), and the limit of £ lom. was extended to £25m. in May 1963. The Board was moreover given power to rediscount agricultural paper for the banks and to make advances against promissory notes secured by agricultural paper in November 1960 (see the Board's, Report for 1961, p. 7, Report for 1962, pp. 45, and Report for 1963, pp. 1112, 1415 and 1718). The fiduciary issue for crop finance is limited to £ £Iom. Thus the potential expansion of the Board's currency liabilities, based upon East African assets, is £35m., or about one-quarter of the stock of money in 1963. At that time the Board held£13.5m of local assets, compared to £64m. of sterling assets.

Page 185 note 1 What usually happens is that a particular project in the development plans of the three countries is financed by currency from the East African Currency Board, issued in exchange for long-term fiduciary securities purchased directly from the governments.

Page 185 note 2 Indeed, this was the idea behind the creation of a fiduciary issue: to free part of the external reserves held in London and to make them available for capital expenditure in East Africa. It should be noted at this point that changes in the fiduciary issue are not the same thing as ‘open-market operations’, i.e. the purchase and sale of local government securities by a central bank. In the first place, the Currency Board has been run much as a government department, rather than a bank; and secondly, it has not attempted deliberately to influence the banks’ liquidity, primarily because the absence of a developed money and capital market and the existence of three separate borrowing governments present considerable obstacles to such an initiative.

Page 185 note 3 The question of what constitutes an adequate volume of external reserves for the domestic currency has been discussed at some length by, among others, W. T. Newlyn and D. C. Rowan, op. cit. pp. 201–5 and 258–61; and Edward Nevin, op. cit. ch. I. The actual problem has been faced by several countries formerly served by a currency board; see, for example, the ‘Nigerian Budget Speech 1962 by the Federal Minister of Finance’ (Lagos, April 1962), p. 7. Also Erin E. Jucker-Fleetwood, op. cit. ch. xx.

Page 186 note 1 Both types of velocity should be considered an index rather than a true measure of the rates of turnover of demand deposits and of the money supply. The gross domestic product is at best a relatively crude estimate, and debits to current account also involve a certain amount of estimation. Moreover, debits to current account and gross domestic product represent flows of values, while demand deposits and money supply are stocks, although annual averages of quarterly figures for demand deposits have been used in Table 3.

Page 186 note 2 See, for example Garvy, George, Debits and Clearing Statistics and Their Use (Washington, Board of Governors of the Federal Reserve System, 1959), pp. 96–9, and by the same author, ‘Structural Aspects of Money Velocity’, in Quarterly Journal of Economics (Camb., Mass.,) LXXIII, 3, 08 1959. Also Selden, Richard T., ‘Monetary Velocity in the United States’, in Studies in the Quantity Theory of Money, ed. by Friedman, Milton (Chicago, 1952). The behaviour of income velocity of money in Germany from 1890 to 1931 is analysed by the present author in Mixed Banking and Economic Growth in Germany (Ann Arbor, Michigan, 1964), pp. 160–6. With special reference to under-developed countries, see Jucker-Fleetwood, Erin E., ‘The Money Supply in Mature and Developing Countries,’ in Basle Centre Publication Series A, no. 38 (Basle, 1961).

Page 186 note 3 McWilliam, M. D., ‘A Savings Experiment in Kenya’, in East African Economics’ Review, VIII, 2 12 1961.

Page 187 note 1 The East African debit statistics also include debits to government accounts, which tend to represent an irregular factor not directly related to economic activity.

Page 187 note 2 Moreover, both series are expressed in current money units, and changes in the price level will therefore tend to affect both series roughly in the same way.

Page 187 note 3 Board of Governors of the Federal Reserve System, Federal Reserve Bulletin (Washington, D.C.), 11 1964.

Page 187 note 4 These are estimates based on the International Monetary Fund, International Financial Statistics, op. cit. for the individual countries.

Page 188 note 1 No attempt has been made to classify the banks according to size. The number of bank offices refers to 30 June 1963. Source: questionnaire sent by the author to all banks operating in East Africa.

Page 188 note 2 Place of incorporation.

Page 188 note 3 Branches, sub-branches and agencies; mobile banking units are excluded.

Page 189 note 1 Figures include the Co-operative Bank of Tanganyika, the Uganda Credit and Savings Bank, and Jetha Lila of Zanzibar. Excluded are Lombard Bank, Banque Congo Belge, and the Exchange Bank of India and Africa, which are no longer operating in East Africa. Source: as for Table 4.

Page 189 note 2 End of June 1963.

Page 189 note 3 Sources: as for Tables 3 and 4.

Page 190 note 1 M. D. McWilliam (op. cit. p. 26) emphasises this shift in the location of bank agencies in Kenya and argues that it reflects the growing importance of African farming in the Kenya exchange economy, coupled with the rising African wage bill. It has been estimated that African purchasing power in Kenya approximately trebled between 1950 and 1960.

Page 190 note 2 This conclusion cannot be quantified, since the expatriate banks do not publish an income statement for their operations in East Africa.

Page 190 note 3 Demand deposits may be withdrawn on demand; time (or fixed) deposits are left in the bank for a certain length of time, during which they earn interest, but are not negotiable.

Page 191 note 1 Building societies have actively developed their deposit business by offering higher interest rates than the banks, and by making deposits withdrawable on demand. Life insurance premiums have grown from £4·8m. in 1957 to £6·5m. in 1962. Total assets held locally and in London by all 130 insurance companies operating in East Africa stood at £32·2m. in 1961, compared to £25·6m. at the end of 1959. See East African Statistical Department, East Africa Insurance Statistics, 1960, 05 1962, p. 16, and Economic and Statistical Review, 06 1964, p. 85.

Page 192 note 1 Sources: as for Table 3.

Page 192 note 2 Individual figures may not add up to totals because of rounding off.

Page 192 note 3 Bills discounted, loans, advances, and investments in East Africa.

Page 192 note 4 Loans and advances to industry, agriculture, and ‘other’ (see Table 10).

Page 192 note 5 Here defined as cash + net balance due from banks in East Africa and abroad + bills discounted. Bills discounted are computed as total loans and advances minus the sum of industrial, agricultural, and other loans.

Page 193 note 1 These cartel-type agreements would in many countries constitute a violation of antitrust laws.

Page 194 note 1 For an inside view on this point, see Tyson, Geoffrey, 100 Years of Banking in Asia and Africa (London, National and Grindlays Bank, 1963), ch. XVI; also Henry, J. A., The First Hundred Years of the Standard Bank (London, 1963), ch. 24.

Page 194 note 2 The determinants of local bank lending policies have implications for the desirability as well as the potential effectiveness of monetary policy in East Africa. See Donald C. Mead, op. cit. pp. 60–6. For a discussion with reference to developing countries in general, see Ida Greaves, op. cit. pp. 46–7, and w. T. Newlyn and D. C. Rowan, op. cit. ch. 9.

Page 195 note 1 Most exports, from the moment of arriving on board ship at an East African port, are financed from London.

Page 196 note 1 Bills discounted, loans, advances, and investments in East Africa.

Page 196 note 2 Sources: as for Table 3.

Page 196 note 3 I.e. Tanzania excluding Zanzibar.

Page 196 note 4 Mostly commercial loans, but including in recent years a growing proportion of loans and advances to governments.

Page 196 note 5 Figures may not add to totals because of rounding off.

Page 197 note 1 This unfortunately, cannot be quantified since no statistics are available on the distribution of loans and advances according to size. The statements are based on discussions with bankers and government economists in East Africa.

Page 197 note 2 See Bottomley, Anthony, ‘The Premium for Risk as a Determinant of Interest Rates in Underdeveloped Rural Areas’, in the Quarterly Journal of Economics, LXXVII, 4, 11 1963, pp. 637–47.

Page 198 note 1 Time certificates of deposit in the United States are evidence that a depositor, usually a business firm, will leave his funds for a specified length of time in return for a specific rate of interest. They are negotiable and are in most cases readily marketable in a secondary market, which is their most attractive feature. See ‘Negotiable Time Certificates of Deposit’, in Federal Reserve Bulletin, 04 1963, pp. 458–68.

Page 200 note 1 For a detailed analysis of the use of agricultural credit to promote economic development, see Belshaw, Horace, Agricultural Credit in Economically Underdeveloped Countries (F.A.O., Rome, 1959). On risk and the nature of security, see pp. 98–111 and 128–31.

* Assistant Professor of Finance, Graduate School of Business, New York University. Material for the study was collected during a visit to East Africa which was partly financed by a grant from the Social Science Research Council, New York.

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