By Jean-Pierre Mfomy, former banker, compensation expert.
The chronic trend of many African states to turn to external sources for financing solutions, despite the latent production capacities and untapped growth potential in their economies, raises the following issue: the need to invent an endogenous financial development solution to promote optimal economic functioning while limiting reliance on external aid and debt.
“Shadow banking”, also known as “shadow finance”, offers African states a model that they can judiciously “replicate” (without necessarily breaking ties with their major partners), by combining it with compensation, in order to bypass the monetary and financial constraints imposed by the current architecture and establish an autonomous and complementary solution for financing the economy and development.
The term “shadow banking” refers to the parallel system of financial intermediation involving powerful actors participating in financing the global economy outside the banking system. This massive machine perpetuates debt and boosts speculation (legitimized by rating agencies), and understanding it requires a certain mastery of traditional banking activities. It can be summarized as follows:
– “Securitization”, transforming illiquid assets (such as long-term bank loans) into easily mobilizable securities;
– “Repurchase agreements”, using securities as collateral to raise liquidity, loan guarantees, credit lines, etc., without selling these securities or issuing new debts;
– Placing on the “bond markets”, transferring securities merged with other derivative financial products into the global financial circulation space (for debt and speculation purposes).
African states can draw inspiration from the functioning principle of “shadow banking” to implement an endogenous and autonomous model of “State shadow banking”, allowing them to locally raise “liquidity” without currency and inject it, through “sealed circuits”, into alternative financing for economic activities and development projects.
Technically, this alternative solution of “State shadow banking” consists, for a State, in inventing its own internal “insurance mechanism” to “create”, risk-free, “non-monetary availability or endowment reserves” mobilizable with leverage (via a specialized organization), according to its needs and pace, to finance its actions, following the simplified approach below:
– The State issues (under its guarantee) either indirectly bonds, selectively “securitizes” domestic debt, or “pledges” a stock of mineral resources (without mortgaging them to external parties);
– The State mobilizes these securities (through repurchase agreements) with local “citizen” banks to raise guarantees or establish funds to cover future debit balances of compensation accounts;
– The State implements, at any scale and in any sector, development programs and projects based on mobilizing local resources and a system of “offset payments” from account to account (off treasury) between participating or beneficiary actors (grouped within an ecosystem), with only negative or positive balances of compensation accounts being settled in cash, following the interbank compensation process.
Such an innovative and inclusive model, integrating not only banking techniques and compensation but also complementary monetary valuation of resources and “improved barter”, allows the State to combine various other “sympathetic” action levers to achieve the objectives of the initiatives to be implemented: mobilization of blocked funds, “State crowdfunding”, tax compensation, State barter, special compensation programs, international compensation.
The financial, monetary, economic, social, etc., advantages in terms of supporting monetary financing solutions, circumventing structural obstacles, consolidating social cohesion, building resilience, strengthening economic solidarity, optimizing treasury, multiplying financing capacities, and achieving objectives, are undeniable:
– At the local level, States build up (in the shadows) guaranteed non-monetary availability or endowment reserves from which they can draw to effectively address the direct causes and effects of high cost of living, decreased purchasing power, or generalized inflation, as well as various unresolved issues;
– At the international level, States efficiently exploit, despite their limited productive capacities, the monetary offer from BRICS to accept payments in local currencies, in order to benefit from advantages such as technology transfers, reduced installation costs, equipment acquisition, decreased financing needs, opening of new markets, industrialization, etc.
The following example, inspired by recent events in Senegal, illustrates the justification of the clever solution of “State shadow banking”:
– The issue: in order to lower the price of bread and mitigate the effects of inflation and high cost of living, a State decides to remove various taxes on wheat flour imports, but faces a “gap” of 2,500 FCFA per bag of flour that millers refuse to bear.
– The solution: the State temporarily implements (under its guarantee) an Industrial and Commercial Compensation Program for stakeholders in the relevant value chains and allocates them respectively, through a specialized compensation organization, a “subsidy” in the form of non-monetary endowment corresponding to the annual amount of the “contested gap”. This endowment is used to indirectly settle certain invoices or debts between them within their production circuit (through an offset payment system from account to account, hence off treasury). At the end of the program, only negative or positive balances of compensation accounts are settled in cash, following the interbank compensation model.
– Results and impacts: maximization of socio-economic returns from the state measure, reduction of cash flow tensions and resource pooling, promotion of new complementarities and solidarities, reduction of disputes and protection of interests, significant mitigation of the cost of living, improvement of the social climate.
As seen, “State shadow banking”, adapted from the successful pre-financing technique implemented in Germany (in the context of the MEFO bills experience) by Dr. Hjalmar Schacht, and involving duplicating “shadow finance” through a non-banking state financial intermediation system, proves to be, for black African economies, a pragmatic and autonomous solution to invent a new parallel (invisible) financing model for the economy and development, and to engage confidently towards their economic and monetary emancipation.
