Summer Medley, Volume 14 #3

Money in the Bank, Part 2

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TROUBLE WAS ALREADY BREWING by mid-February of 1995, when panic withdrawals were occurring in large enough volumes across the entire Meridien BIAO African network to prompt statements of assurance from its officials. John Kapotwe, chair of the Zambian subsidiary, Meridien BIAO Bank of Zambia (MBBZ), publicly described the bank's position as "secure," while behind the scenes, things were anything but. Zambian central bank documents written at that time declared MBBZ insolvent and recommended its closure. However, the government at large did not act on this recommendation for close to a month and a half. By then Zambian taxpayers, through the central bank, had lent Meridien some $60 million in emergency funding, a figure that would jump to $95 million before all transactions finally ceased. That's in the order of 100 billion kwacha, the Zambian national currency, some of which the government had needed to specially print. [FN 4]

On March 27, 1995, the Zambian government finally separated MBBZ from the rest of the Meridien BIAO group and turned its operations over to an interim management committee. On May 22, MBBZ was officially put into receivership, and the auditing firm KPMG Peat Marwick Zambia was commissioned to prepare a due diligence report on the causes of its failure. On June 1, the government promised to repay within ninety days up to 500,000 kwacha to Zambians who had lost deposits in Meridien. That amount was worth something over $600 at the time, but would drop to about $500 by late December of 1995, when people actually began to receive the money. For the Kasisi Agricultural Training Centre, that sum would represent a third of one per cent of what they had had on deposit. Current estimates put their best chances of ultimate recovery at five cents on the dollar.

Other African countries hosting Meridien subsidiary branches had similar experiences, including Gabon, Kenya, Burundi, Ghana, Niger, Gambia, Sierra Leone, Tanzania, Togo, Cameroon and Burkina Faso. Officials in Swaziland, looking to recapture monies they believed had been transferred to the Bahamas-based parent company, launched a suit that resulted in its liquidation.

So what had gone wrong? Well, not all that much had had to. Meridien had been a disaster waiting to happen, and the only people who couldn't have foretold it were the millions of ordinary depositors like Paul Desmarais.

ONE OF THE GROUP'S TWO FORERUNNER chains, Banque Internationale pour L'Afrique Occidentale (BIAO), founded in 1853, carried out central bank functions for Francophone Africa right up until the end of the explicitly colonial era in the 1960s. The establishment at that time of two new regional development banks (smaller, more local versions of the World Bank) left BIAO to recede to a more ordinary commercial banking role--not one it was to perform terribly successfully.

By the late 1980s, the last of the French banks backing the BIAO chain was ready to abandon it entirely and allow it to trudge to an imminent, ignoble death. Heads of state in certain affected African countries were incensed with this fatalistic plan and pressed for a buyer to be found who could reconstruct the failing network. Western banks wanted nothing to do with it, in part because of their recent experience with Bank of Credit and Commerce International (BCCI), a much larger network of Third World banks peppered with accusations of corruption, drug and arms trafficking, connections with international terrorism, and fraudulently floated intercompany debts.

Enter the "African" buyer, Andrew Sardanis. Actually a Greek from Cyprus, Sardanis was a longtime Zambian resident and entrepreneurial success story. His ITM group of companies was principally involved in mining, construction and commodities trading but had recently extended into banking with the creation of Meridien International Bank Limited (MIBL), licensed in the Bahamas. Originally set up to provide internal banking services within the ITM group, MIBL soon expanded to operate commercial banks in Zambia and five other African countries.

When the BIAO chain came up for grabs, Sardanis made a largely unchallenged bid to unite it with his new banking network. He would have preferred to have partners in the venture and keep only the minimum 51 per cent needed for personal control, but other investors proved very difficult to find. Western bankers again expressed their collective skepticism, as the World Bank's private sector arm, the International Finance Corporation, refused to offer financing aid. Its reasoning? Too much confusion surrounding the jurisdiction and supervision of the network. The only organizations that would come on board were the two regional development banks, and they combined to take only a 26 per cent share. This left Sardanis's MIBL with a 74 per cent majority in the new enterprise, Meridien BIAO sa, a bank holding company registered in Luxembourg.

Prospects for the new venture--a failing chain of banks taken over by an organization with little experience in banking--were further reduced by the fact that, as Euromoney magazine reported, "Sardanis put no new hard cash into Meridien BIAO." By late 1993, two years after Sardanis's acquisition, the magazine was referring to the Meridien system as a "high-wire act":

"While he and his senior executives live a champagne lifestyle flying in chartered aircraft, first class or Concorde and staying in top hotels wherever they go--the group has just bought a $9 million second-hand Gulfstream jet which Sardanis insists is needed to overcome the difficulties of travel in Africa--the meagre profits suggest the group has little money to throw around. Yet the fundamental problem is less one of extravagance and more that the group's capital resources are being severely stretched. Sardanis and his finance director acknowledge that part of the banking group's investment is funded by an inter-group loan with no formal repayment schedule, which raises questions about the group's long-term ability to grow." [FN 5]

Or survive. Less than two years after that was written, all of the subsidiary branches would be out of the group's control, Meridien BIAO sa and its controlling parent Meridien International Bank Limited would both be in liquidation, Sardanis would have resigned as chair of the former, and police would have unsuccessfully "swooped" onto his Zambian estate in search of him. In July 1995, Zambian President Frederick Chiluba quoted the due diligence report by Peat Marwick as saying that an estimated $95 million had been fraudulently or irregularly drawn from MBBZ, Zambia's own local subsidiary, and that "the collapse of the bank was entirely attributable to the mismanagement and fraudulent activities by the bank's shareholders who have transferred large amounts of money to offshore accounts." [FN 6] Moreover, the World Bank has severely criticized the Zambian government for its handling of Meridien and reduced its flows of aid, further depressing an already deeply troubled economy.

CAN THE FALL OF THE MERIDIEN CHAIN simply be blamed on the greed or plain incompetence of its owners, then? No, that's far too simple an explanation, regardless of what horror-story accounts of their actions ultimately come to light.

For one thing, Andrew Sardanis has always maintained that the established banking communities in Africa and Europe had been aligned against Meridien's chances of success from the start. In 1993, Sardanis complained of Crédit Lyonnais, Banque Paribas, Standard Chartered and Barclays Bank cutting off their credit lines to his network. [FN 7] At the height of the panic, in February 1995, he would accuse Standard Chartered and Barclays once again of having "deprived Meridien BIAO bank of lines at a very crucial time." [FN 8] Nor is it difficult to imagine established, European-dominated banks standing in opposition to Meridien during its brief period of competition. Who had more to lose than they did from the emergence of a large "African" network, or more to gain back once the newcomer had teetered and collapsed?

Worse, nobody had acted to prevent the whole debacle. The very birth of Meridien BIAO should never have been allowed to happen: failing banks simply changed hands without anything being done to improve their chances to succeed. Western bankers knew this very well (all the more in light of the BCCI scandal exploding at the time), and expressed this knowledge in their refusal to come aboard the project. But that's where their input stopped, leaving African countries to face the crisis on their own without an adequate institutional and legislative framework. A more fundamental shortcoming in the Meridien affair, then, was the lack of oversight and supervision of the sort that western bankers and their customers take for granted at home.

Kasisi's master blacksmith, Mr. Moyo, in the Appropriate Technologies Workshop. (Click on the thumbnail to view the fullsize picture; 90K.)

In Canada, all ordinary bank deposits are guaranteed by the federal government up to a current maximum of $60,000, a hefty percentage of each is transferred immediately to reserves at the Bank of Canada, and we have stringent legislation limiting foreign ownership of any financial institution. These are some of the standard tools of modern finance, developed in the West over centuries. There is no more reason to ignore them when establishing or enhancing financial infrastructure in LDCs than there would be to ignore Ohm's Law when building a power plant there. Moreover, these are exactly the kinds of systems that developing African countries are now putting into place, in the wake of the storm that was Meridien. But why did they have to learn that lesson so dearly? Where were the World Bank and the IMF, so rarely bashful about even the most paternalistic and heavy-handed intrusions into nations' economic autonomy? How can a country develop when millions of dollars of its citizens' and businesses' money can simply disappear into the ether of an unregulated banking network?

It's useful at this point to remind ourselves of exactly who the IMF and the World Bank are. They're not fundamentally agricultural experts, educators, health-care specialists or environmentalists. While the IMF and World Bank should not be excused for having an agenda that seems to consistently make too low a priority of these other disciplines, at least it can be undersood that they are not the agencies' primary interest. But banking? The IMF and the World Bank are bankers! And if bankers, claiming to be acting in the interests of the economic development of Third World countries, cannot or will not help them clean up their banking act, then what are the World Bank and IMF for?

Perhaps they're for the Barclays and Standard Chartereds of the world. They certainly seem to be for the continued exploitative transfer of primary resources from the have-nots to the haves at prices that can never realistically hope to allow parity. They're for creating economic conditions within developing countries that give confidence to huge transnational corporations. But what about the confidence of ordinary citizens, local businesses and the voluntary development sector, in choosing a bank to safeguard their limited resources? All of those people were left by the World Bank and the IMF to roll the dice and take their chances, and given no help when the choice proved unlucky.

These are the organizations that represent the developed world to the undeveloped. This is how billions of people see, and perhaps judge, you and me. Are they wrong?

BACK AT KASISI, A YOUNG MAN repeatedly steps left-right, left-right, on a contraption made of boards, pulleys and rope. Lean and hard already, he's not doing this for physical fitness; rather, that gizmo is a "treadle-pump," developed in the Appropriate Technologies Workshop. The stepping action draws water up from the river surface as much as two metres below, and can raise it another two metres while throwing it across the fields where the young man and his fellow students are training in organic vegetable growing.

A short distance away, a woman with the inevitable baby strapped to her back is busy making roofing tiles out of sand, water and a little bit of cement. The tiles are for a building either she or a neighbouring family will inhabit in a brand new community springing up fifteen or twenty kilometres deeper into the countryside. (Her husband is there on site right now, simultaneously making bricks to be the walls.) Ten families, all graduates of the two-year training program, have decided they want to establish a new settlement of their own to take full advantage of the techniques and cooperation they've learned at Kasisi. Some buildings are standing already; the community owns some cattle, pigs and "broilers"; a borehole has been dug for water. But any kind of success will require further years of hard work, and more than a little luck. Still, discussion is already underway about the new school and clinic they hope to build and staff before too long.

And then there's the compound of half-completed buildings, right on Kasisi's grounds, standing empty and useless at the moment, even as agricultural professionals and ordinary farmers clamor for the additional training that was scheduled to begin here, before the Meridien collapse, even as hundreds of thousands of other rural Zambians continue to hover on the edge of subsistence.