Mustering 'money creation' the Sepik way

JUTS OUT
-CYRIL GARE

SOME time ago, The National quoted one Chris Warrilow of Port Moresby stating the "K-DAY" - the date believed to be the born day of our official currency, Kina and Toea was set on April 19, 1975. 

However, the legislation for the new currency was passed in the House of Assembly as early as 1973 (assented to on October 22, 1973). Nearly five months later, Hansard records showed a presentation made to the House by then Minister for Finance, Mr. Julius Chan (now Sir Julius) on March 6, 1974 during a number of announcements were made including: "I therefore propose that the name of the dollar equivalent should be Kina...".

Mr. Warrilow also stated that Mr. Chan also announced that the Reserve Bank of Australia (RBA) had been given the contract to print a year supply of notes. The RBA's Note Issue department thus proceeded to prepare designs for the notes with the assistance of Mr. Willie Stevens of Lalaua, Milne Bay province, then a student at the Goroka Technical School. So according to Mr. Warrilow, perhaps, technically speaking, the Kina was therefore "introduced" on Wednesday, March 6, 1974

 (ABOVE: Mr. Bill M Wangi, CEO of the Sepik Savings & Loan Society Ltd and staff busy at work at their new look Dagua market office in Wewak. Picture by Cyril Gare)
 


What is money? 
Throughout history, many items, sometimes even bizarre ones, have served as money. The Tolais use "tabu", Sepiks use shell ring and pigs tusks while other parts of Papua New Guinea have their own traditional monies for buying and selling of goods and services in a subterranean economy.

Economists define money with four functionalities:

• Medium of Exchange: It facilitates the exchange of goods by allowing people to exchange their services and then exchange money for goods and services;
• Standard of Value: It provides a standard in item of which goods can be valued and thus readily compared with each other;
• Standard of Debt: Its allows borrowers and the lenders to specify how a debt can be repaid in a generalized form of purchasing power rather than in specific goods;
• Store of Generalized Purchasing Power: It provides purchasing power in a general form that can be used to purchase any particular good the holder then desires.

These functions of money provide some standard for an ideal money. While no money has ever been created that has performed ideally, there has been a movement in this direction - slowly, haltingly, and with many reserves - in human history.

Function of Money Creation
Banks are said to be creators of money in the art of taking deposits, lending, and managing loan repayment. This tradition can be backdated to 1600's during the time of goldsmiths who began to lend out funds of their depositors on a system of "100% reserve". Today it is different. Modern banking operates a "fractional reserve" system - reserves equal to only fraction of the total obligation outstanding. The aim is to maximize profit.

Most money in circulation is created by bank lending. Thus, benefits accrue to the bank plus interest. When the government creates and spends money, it stays in circulations. Under a debt based system, money is created when bank lends it. Money is destroyed as loans are repaid. New loans must constantly be issued not only to maintain money supply but to make it possible to repay loans, along with interest due. With time, the society becomes ever deeply indebted to its banks. If debts do not continue to expand, loan repayment becomes impossible and the economy is subject to crash.

Due to cultural as well as socio-economic factors, many commercial banks in Papua New Guinea have been very strict on their lending policies and the pinch of this is felt at the very heart of common and ordinary citizens. Because of stringent lending, loan repayment was stagnant, so money making functions come to a dead end cycle. This resulted in stagnancy of economy which required structural adjustments.

Financial Sector Reform
In 1995, the Mekere Government undertook major structural reforms, perhaps the first after Independence, a re-alignment of this magnitude, on the statecraft. Among others, his Government undertook the financial sector reform beginning with the "mama bank" (Bank of PNG) which saw the re-alignment of its roles and functions through legislative amendments, and down to mid-level non-banking financial intermediaries such as FinCorp, Kina Securities and others and finally to grassroots level with the creation of the Savings and Loan and Cooperative Societies.

But, according to Dr. David Kavanamur, "the provision of financial services for rural development or more specifically poverty alleviation has evolved under various banners from 'subsidized credit' in the 1970's, 'micro-credit' in the 1980's and micro-finance in the late 1990's. This evolution was reflective of the transition of world economies towards more market-based principles of economic management".

Nonetheless, all was good for the purpose of decentralization and shifting of money making function to non-banking sector. When this happens, more money is given out (lend) thus more loan repayment therefore resulting positively on the overall performance of the economy.     

According to Kavanamur (2002), PNG has one development bank, 1,000 credit unions, 334 Grameen prototypes and 500 revolving funds serving an average rural population of three million people - most of which came about as a result of the re-positioning of the financial sector.

This may not be as many as Dr. Mark McGillivray, the Chief Economist of AusAid expected as noted from his Pacific Economic Survey 2009.

"Large segments of the population remain "unbanked" that is, they do not have any savings accounts or taken loan with commercial banks or microfinance institutions.

"Broadening the accessibility of financial services is a priority for many pacific island countries and Timor Leste," Dr. McGillivray stated in part in the report.   

Nevertheless, in East Sepik, we currently enjoy the services of the Sepik Savings and Loan Society (SSLS), Teachers Savings and Loan Society, National Farmers Savings and Loan Society, the Nationwide Micro Bank and more than 400 affiliates of East Sepik Cooperative Societies Association Ltd - representing 50 per cent of all registered cooperatives in PNG -, all at which were proud off-springs of the 1995 financial sector reform.

From a humble beginning in 2000 - following the endorsement by East Sepik Provincial Government under the then Governorship of Angoram MP, Arthur Somare, the Sepik Savings & Loan Society has rapidly grown and as at December, 2009 has 20,000 plus members with seven branches including Wewak (9,056 members), Maprik (2,231), Angoram (75), Ambunti (658), Aitape (1,137), Madang (4,447) and Port Moresby (figure not available immediately at time of print) placing a total value of their deposits at K9,563,674.

In 2009 under the management of Mr. Bill M Wangi, Chief Executive Officer, Sepik Savings & Loan Society has introduced a new networking community representation concept called the "Community based Microfinance" which was established in Nuku in November, 2009 and will expand to Kubalia, Wosera, Kusambuk and Lumi this year.

"Membership increased by 33 per cent in 2009 while total deposits increased by 15 per cent during the same period," Mr. Wangi said. 

He added that 3,537 loans were funded last year valued at K3,574,048 for purposes such as school fees, personal expenses, cocoa production, bride price/wedding, trade store, poultry projects, funeral expense, etc most of which items would not have been possibly funded through commercial banks. Loan repayments received were at K2,007,473.

The Society were able to fan well in 2009 due to its four attractive poverty-reduction products namely the Main Savings, Budget Savings, Xmas Savings and the Educational Plan Savings products.

"The demand for loans from local entrepreneurs, business and farmers is strong and growing...there is serious lack of debt capital which could help create new business or finance the expansion of existing ones," Mr. Wangi highlighted.

The Human Scale Enterprise
Savings and Loan Societies operate on a very patriotic operational principle that states that "members of this institution (society) shall be equal owners and share the mutual understanding and relationship of helping each other". They are people's institutions, created by them, for them, and always will be theirs and for generations to come.

Savings and Loans Societies therefore are small human scale enterprises as oppose to large capitalist genres. The theory of market economics is quite explicit in stating that the market effectively depends on large size of relatively small enterprises that have less power to externalize their cost onto the public.

The more concentrated the power becomes, the difficult it is to hold it accountable to the public. Smaller enterprises generally have lee power and therefore are less likely to abuse it. One of the defining differences between capitalism and market economy is size. Capitalism is about creating massive concentration of the monopoly power immune from market forces and public accountability. Thus, under capitalism the market is always and everywhere a myth. Ironically, only by dismantling capitalism can the market reign.

Maladministration of the earth's wealth provides the leeway for a build up of economic power which is increasingly concentrated not with governments but with global corporations. Corporate executives wield unprecedented power over societies. They form part of a newly-dominant and assertive global institutions, state bureaucracies, and inter government agencies. The multinational corporations (MNCs) are among the key agents in the process of globalization. They embody the emerging logic of global accumulation of wealth and power as they mark our new physical, cultural and economic order in the World as it is today.

Capitalism in the form of all transnational corporations has monopolized the production of manufactured goods, commerce and marketing, banking and information. It is maintained that they use not only their enormous economic power but also corruption, unfair and immoral practices to eliminate competition and preserve their dominance.
PNG like other third world countries are therefore forcefully made dependent on developed countries for
capital, technology and markets. The rich set interest rates, terms of trade, tariffs and import barriers. Under such arrangement, they are able to maintain economic dominance and drain off surpluses from the poor countries. In the making, the World is polarized into the rich and powerful "haves" and the poor and dependent "have nots."

Few economic activities actually require large enterprises. Most of the economic needs of Papua New Guinea can readily be met by smaller firms like Savings and Loans Societies that may join forces together in networking structures.

With nearly half a billion kina worth of both "investment" and "development" projects marked for East Sepik during this period, Mr. Wangi was optimistic that SSLS will be able to participate meaningfully in these ventures to maintain its reputation as the "true Sepik people's bank".   

The emergence and evolution of financial services including cooperatives societies, savings and loans societies and micro finance schemes in Papua New Guinea captures the changing perception in that the poor are indeed bankable and not "unbanked" as may be the general view of many un-informed outsiders.

Our people can afford and are already paying market interest rates which at current level are around 11 per cent. This is encouraging and a positive conception accepted as a necessary tool in the fight against poverty.

The Sepik Savings and Loan Society therefore is charting on calm waters and 'Ahoy' land should near approach.