Every Bank is a 'Ponzi Scheme'...sort of
A Ponzi scheme, in its most basic form is an investment scam in which clients are paid using the proceeds from the investments of new clients. It collapses when no other clients can be found to sustain it. Pyramid schemes are much more volatile forms of Ponzi schemes, because they rely on having more clients joining each time, i.e. when 10 clients join, 15 more or so are required to join before the next set of investment returns can be paid to the existing clients. This is why pyramid schemes don't last long. A well crafted Ponzi scheme, however, can last decades. That is in essence what banking is.
In order to ensure that bank customers continue to enjoy swift payments of their deposits when they need it, banks need new customers to deposit money. They need this because the deposits are used to give loans to others, the bank's real customers. If a bank brings in regular deposits, it can run for hundreds of years. If you are following closely you will realize that this is very much like a Ponzi scheme: clients of the bank (the existing depositors) are paid using proceeds from the deposits of new customers. This is an oversimplification because most of the time the "new customer" is just an existing customer bringing in new deposits. When the bank's 'Ponzi scheme' collapses, it is called a run on bank.
Now, don't panic. Even though banks are run in the same manner as Ponzi schemes, they generally work far better than the many scams that use the same principals. This is because of one key factor: regulation. Every bank is managed by some kind of regulator. The regulator ensures that the bank does not do things that jeopardize the stability of the 'Ponzi scheme'; they say its called the 'banking system'. I'm old school, I call a spade a spade, not a pig wearing lipstick.
How do regulators ensure this stability? By ensuring that banks do not take unnecessary risks with depositors money, and by requiring bank owners to have enough of their own money (capital) available to keep them going on those rainy days when deposits are not coming in as quickly as they need it. What are the risks? Giving out loans to bad debtors. Remember it is the deposits that are used for lending. If a debtor pays back the loan on time, the depositor's money has been 'recovered'. If that money is not given out as loans, the bank will not need new deposits. However that can't happen, since the bank needs to pay its workers and its shareholders. Loans must be given, and so the cycle continues.
This is why any one giving deposits to any company needs to ensure that that company is well regulated. If you give your money to any unregulated company, even if they are legitimate and are careful with your money, you run the risk of loosing everything. Banks and other deposit taking institutions in Ghana are regulated by the Bank of Ghana. Investment houses in Ghana that sell securities (any kind of item that can gain or lose value and can be sold at a later date for hard cash) are regulated by the Security and Exchange Commission of Ghana. It has emerged recently that both these regulators have fallen short in their ability to regulate these companies, and this has caused a crisis. Thankfully we now know and we are all keeping an eye on them to ensure they do not mess up.
It also helps when there are many more eyes on your money. Foreign banks thrive in Ghana because aside from the local regulator, they are monitored by their parent banks, who are in turn monitored by their own regulators. So many watchmen...it doesn't hurt to be guarded by an army. Those of us who are not patriotic with our money can have some extra safety by investing in foreign banks. Its not a guarantee, however: just look at the American banking crisis that crippled the global economy in 2008, and ten years on is still having an effect. However foreign banks are a lot better than some of the criminal local institutions we have in Ghana.
If you need banking/financial software, or advice on building a strong financial software system, get in touch with me: https://www.quakearts.com, kwaku@quakearts.com, +233207604492
In order to ensure that bank customers continue to enjoy swift payments of their deposits when they need it, banks need new customers to deposit money. They need this because the deposits are used to give loans to others, the bank's real customers. If a bank brings in regular deposits, it can run for hundreds of years. If you are following closely you will realize that this is very much like a Ponzi scheme: clients of the bank (the existing depositors) are paid using proceeds from the deposits of new customers. This is an oversimplification because most of the time the "new customer" is just an existing customer bringing in new deposits. When the bank's 'Ponzi scheme' collapses, it is called a run on bank.
Now, don't panic. Even though banks are run in the same manner as Ponzi schemes, they generally work far better than the many scams that use the same principals. This is because of one key factor: regulation. Every bank is managed by some kind of regulator. The regulator ensures that the bank does not do things that jeopardize the stability of the 'Ponzi scheme'; they say its called the 'banking system'. I'm old school, I call a spade a spade, not a pig wearing lipstick.
How do regulators ensure this stability? By ensuring that banks do not take unnecessary risks with depositors money, and by requiring bank owners to have enough of their own money (capital) available to keep them going on those rainy days when deposits are not coming in as quickly as they need it. What are the risks? Giving out loans to bad debtors. Remember it is the deposits that are used for lending. If a debtor pays back the loan on time, the depositor's money has been 'recovered'. If that money is not given out as loans, the bank will not need new deposits. However that can't happen, since the bank needs to pay its workers and its shareholders. Loans must be given, and so the cycle continues.
This is why any one giving deposits to any company needs to ensure that that company is well regulated. If you give your money to any unregulated company, even if they are legitimate and are careful with your money, you run the risk of loosing everything. Banks and other deposit taking institutions in Ghana are regulated by the Bank of Ghana. Investment houses in Ghana that sell securities (any kind of item that can gain or lose value and can be sold at a later date for hard cash) are regulated by the Security and Exchange Commission of Ghana. It has emerged recently that both these regulators have fallen short in their ability to regulate these companies, and this has caused a crisis. Thankfully we now know and we are all keeping an eye on them to ensure they do not mess up.
It also helps when there are many more eyes on your money. Foreign banks thrive in Ghana because aside from the local regulator, they are monitored by their parent banks, who are in turn monitored by their own regulators. So many watchmen...it doesn't hurt to be guarded by an army. Those of us who are not patriotic with our money can have some extra safety by investing in foreign banks. Its not a guarantee, however: just look at the American banking crisis that crippled the global economy in 2008, and ten years on is still having an effect. However foreign banks are a lot better than some of the criminal local institutions we have in Ghana.
If you need banking/financial software, or advice on building a strong financial software system, get in touch with me: https://www.quakearts.com, kwaku@quakearts.com, +233207604492
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