Monthly Archives: November 2020

“What is a bank” asked my granddaughter to her dad. “Ask grandpa, he worked for the bank” replied her dad.

I explained: “Well, a bank is where you deposit your money. You see, in the past people hid their money under the mattress. This is unsafe because thieves can steal the money, or fire can burn down your house and money. So, it is more secure to place your money with a bank”. This explanation is good enough for an eight-year old but of course there is more to it. It is perhaps still a mystery to many people as to how a bank really operates.

Lending money has a long history. You will remember Shakespeare’s Merchant of Venice, whence Shylock demanded a pound of flesh when Antonia could not repay a loan. This is exactly what a bank does today, the lending of money, to be repaid afterwards with interest.

A bank can only lend out a limited amount of money out of its own capital. So, it needs to gather deposits from the public which it may then lend. The more the deposits the more it can lend out. To put it in perspective, in 2020 HSBC has an equity (capital) of 192 billion US Dollars while it lends 2.715 trillion. Deposits are therefore very important to the banks, and that’s why banks compete vigorously for deposits by offering attractive interest rate.

There are different options as to how you can park your money with the bank.

The most basic is the “Savings Account”. You get a passbook, though nowadays you get a statement instead, which records the money you put in as well as the money you take out. In the 1960s HSBC in Hong Kong encouraged children to save by providing widely its own iconic “piggy bank”. Children were excited to watch their passbook balance built up and earning monthly interest in the process. If you have large amount of money, you can park them in a Term Deposit Account which offers higher interest rate. Term deposit ranges from minimum 7 days to 5 years. During that period, you cannot withdraw the money, unless you pay a penalty.

Next you can park your money in a Checking Account. I think Checking Account is a marvel financial instrument. Imagine you have to carry large amount of bank notes to pay for something you want to purchase. We can go further in time, when in China gold had to be physically moved from one place to another for payment of goods, the convoy guarded by Kung Fu masters from bandits. Payment by cheque has now lost its luster, substituted mainly by on-line electronic payment. I have not touched my cheque book for the last ten years.

It is interesting to note the impact between keeping your money under your mattress and depositing it in a bank. Money kept under the mattress is dead money, it does nothing to the economy of the country. However, money deposited in the bank creates economic activity because the money is lent out to other people who can use it to do more business. In fact, one hundred dollars of deposit can increase automatically threefold and becomes three hundred eighty dollars. It works like this. Customer A deposits $100.00 in the bank. The bank can lend 75% of this deposit to B, equal to $75.00. B has now $75.00 in the bank. The bank can now lend 75% of $75.00 to C, equal to $56.00. It keeps on going until the total money increased to about $380.00. All started because of the first $100.00.

Where does the bank make its profit? It is the difference between the interest it receives from its borrowers and the interest it pays to its depositors. Of course, competition among the banks will dictate how much interest a bank pays its depositors and how much it charges its borrowers. Bank also derives income from service charges and other fees.

It is interesting to note that there is time when depositors, not only do not receive any interest on their deposits but have to pay the bank interest on their deposits. This is when there is so much money on the market which the bank is unable to lend out.

Is it absolutely safe to keep your money in the bank?  Not necessarily. Because the bank may not be able to recover the money it lends to the borrower. When too many people cannot repay the bank, the bank in turn cannot repay your money. When people hear the bank cannot repay your money, they in turn rush to try to withdraw their money from the bank. This is called a bank run and it often leads to the bank going bankrupt. In 1965 Hang Seng Bank in Hong Kong faced a bank run but was rescued from bankruptcy by HSBC acquiring a 51% interest in Hang Seng Bank. You may also remember the collapse of Barings Bank, one of the oldest merchant banks established in 1762, when a 28 year old employee lost 1.6 billion Pounds in unauthorized trades.

There is relief to small depositors though. In many countries, customer deposits are guaranteed by the Government up to a certain limit. For example, in Canada, the Canadian Deposit Insurance Corporation (CDIC), which is a Crown Corporation, guarantees the deposit of each customer up to C$100,000.00 per bank, if that bank is a member of CDIC. If you have C$200,000.00, you may place C$100,000.00 with Bank A and the other C$100,000.00 with Bank B, you are then fully covered. If you place C$200,000.00 with Bank A, only C$100,000.00 is guaranteed, the other C$100,000.00 may be at risk.

My granddaughter turned eight this summer. She wanted to ride a bike. Daddy bought her a new bicycle that fitted her height. Over two weekends, she was riding good and a happy girl she was. She was able to master riding so fast because firstly she had the perfect size bicycle and secondly, she had all the help and guidance from dad and grandpa.

In contrast as a kid in Mauritius in the 1960s, I learned to ride a bike on my own. Dad had no time to help and guide me. Further, I had to learn on an adult bike, so oversized to my small physique, that I could not sit on the saddle. Instead my left foot on the left pedal and my right foot went through the triangle frame to reach the right pedal. When I grew taller, I was able to swing my right foot over, and sat on, the horizontal bar of the bicycle frame. Many years passed before I could sit on the saddle proper.  It therefore took me longer to master the bike, and I encountered numerous crashes and bruises. Nevertheless, I was also a happy boy.

Today bikes come in a variety of shape, size and colour, and much lighter and cheaper. My granddaughter bike costs Canadian dollars two hundred and fifty, a pittance compared to the average income of a family. My bike cost two hundred rupees which was exactly my monthly salary working as a junior clerk in the Ministry of Finance. Price has really come down drastically over the decades. Bikes are now mainly manufactured in China, then they were made in Great Britain, with Raleigh and Humber as the most popular brands.

While today bikes are mainly for leisure in developing countries, in my childhood bikes were essential for a person to move from one place to another, in the absence of public transport. Also, bikes were used to carry goods, the local boulangerie used bike to deliver bread to our boutique each morning. We even carried sack of rice, furniture and more.  We carried people who sat on the horizontal bar of the bike frame or on the rear bike rack.

Our bikes came in one size, the adult size, always in black colour, but there were men’s bikes and women’s bikes. Women’s bikes did not have the horizontal bar on the main frame, for the simple reason that women did not then wear pants, and the horizontal bar was a hindrance to the woman’s dress. Very few girls rode bike though. It was a bit later that we had sportive bike, a more colourful, youthful and nice looking thing which every teenager wished they could own one.

Bike was a luxury, not many households could afford one. My family owned one as a matter of necessity, it was a second-hand bike. There were several bicycle repair shops in the city, which were kept busy everyday fixing mainly punctured tire. Most bike owners knew how to fix a punctured tire though, as well as handling routine maintenance. Frequently we oiled the moving parts of the bicycle, particular the wheel chain, and we all had a small tin of lubricating oil at home.

Our bikes at the time had some peculiar characteristics. For instance, the seat sat on springs, which today is a thing of the past. I guess the roads were uneven and bumpy, so the springs were necessary for a more comfortable ride. All bikes had mud guards on both wheels, because without these guards, the wheels flipped muds all over when it rained. The rear mudguard always had a red reflective light, so that car drivers became aware of the bike ahead. Head light was also an essential part of the bike because the streets were dark at night for lack of streetlight, further made hazardous by numerous potholes. Head lights were thus big in size and powered by a dynamo which churned by the running bicycle tire. A bicycle bell was a must as it needed to be frequently triggered as the bike zigzagged through the crowd walking on the streets, sidewalks were few and apart. The ringing of the bell became a common sound. We also carried a hand pump, just in case of a flat tire, it is hooked parallel to the V shape bar of the bike frame.

Bicycle theft is universal. We locked our bicycle with a simple lock, similar in shape and principle of a hand cuff. Not very foolproof as we all knew how to unlock it with a hair pin. This “hand cuff “style lock is ineffective today because thieves would pick the whole bike and drive away with it. Today you need to lock your bikes to a pole or bike rack. If you make the mistake of chaining the front wheel to a rack, thieves will still take your bike less the front wheel.

Have not heard of Bike Graveyard, here is the story. Around 2015 in China the concept of Dockless Shared Bicycles was put in motion, whereby people shared bikes to move around the city. Very economical and convenient to the consumers who can unlock and pick up a bike with their handphone and leave the bike anywhere at random. Over 70 Companies raised over 10 billion of US dollars to finance their projects, resulting in over 26 million bikes overwhelming the sidewalks and public space of major cities. Most of these companies went bankrupt and millions of bicycles were left rusting in open space, hence the bike graveyards.

In our visit to Mauritius in 2014, my son and I biked under the sunny blue sky of the island and amid sugar cane fields from our Hotel to Deep River to see my past aunt’s old boutique. It was one of the most enjoyable bike rides we ever had. Among the breathtaking sceneries, we found a small eat out with the best Chinese fried rice cooked by an Indian Chef.