Local Economies workshop
Session 4: Risk and Investment
Discussant:
Stuart Theobald
My background is as a former financial analyst and a financial journalist. So my
perspectives on what we’ve heard – and thanks for three really interesting papers, with
really fascinating insights – comes from comparing what we’ve heard to my
understanding of the formal sector of the economy and some of the formal institutional
structures that we have in banking and in risk in different perspectives.
First of all to talk about Simunye Bank. I’m very interested in the institutional
framework of rural and community banks. I have at times been rather cynical about the
business viability of the whole concept, particularly within the context of the Cooperative Banks Act, and I wonder in Lizzy Hull’s research whether there was much
cynicism that came out from the perspective of the communities. You mentioned that
they have a problem with the branding and positioning of the bank as something other
than a “bush bank”. Now we know in banking that the core attribute of a successful bank
is one that’s trusted, without trust you effectively don’t have a bank, and your business
model is really about arbitraging the trust that your depositors hold in you against your
ability to manage borrowers from you. I wonder how the community, and perhaps Mrs
Dlamini, perceive the bank from that perspective. Whether they believe in the business
model of the bank and whether they believe they can trust it, and how that informs your
perceptions of long term viability of the bank. You wrote in your paper that it had
managed to gather together deposits of R1 00 000, which they put under deposit in ABSA
bank, so I imagine they’re earning interest of a couple of percent. I wonder how the
returns filter through to the community, and what kinds of competition there are for those
funds in the community and how that effects the ability of the bank to gather deposits?
I was also interested in some of your comments on the idea of entrepreneurship,
particularly as it comes across from a government policy perspective. Quite clearly the
whole ethos of the DTI is around providing capital that can generate returns and unlock
entrepreneurial capacity in the economy more broadly. So I’m not surprised by your
1
points on the literature and how that comes across. I wonder in the community whether
it’s perceived that way. You characterised the potential of loans from banks as yet
another mechanism of cash flow to individuals, among others. I understand how they
would diversify their risk - that was very interesting. But by characterising bank loans as
a mechanism of cash flow as opposed to a source of capital, I wonder how that works in
practice. Will individuals use that money in a way the policy makers would want them to,
in other words to invest in ways of generating return as opposed to consumptive
spending? Is that source of cash treated in a fundamentally different way by those
individuals, from other sources of cash that they might be generating from trading or
what have you?
Erik, I found fascinating your paper the idea of voluntary labour in the process of
selling funeral policies, and your discussion about what the potential motivations for that
voluntary behaviour are. But I wanted to know more. Clearly, the funeral policy
providers have hit on something because it’s an amazingly successful business model for
these guys, if you are Hollard, providing policies through shebeens across the townships.
Your paper switched on a light in my head to understand “Ok, it takes a lot of voluntary
labour to make these things work”. Maybe the same kind of idea applies to the
community banking model: it actually takes voluntary labour at a community level to get
a community bank and a business model to function. But it is difficult to understand the
motivation - perhaps you could give us more insight there? How does a large insurance
company manage to motivate the brokers? It’s not just brokers; it seems to have a kind
of informal community level network and institutional structure that operates, which
eventually results in these policies being sold. That’s very interesting and I think there’s a
lot that could be learned from that, that could perhaps be tapped to find other ways to
make different forms of financial services viable, that just on a pure standard economic
model wouldn’t work. Maybe you could share some comments, share some insights, if
there are any into that idea?
Ilana, it was very interesting the way you characterised those individuals’
understandings of risk and fascinating that they see the lottery as one avenue of risk that’s
very similar to other risks they face: be it buying in stock that they’re going to sell or
2
lending money to other people. And you’re very cynical, obviously, about trying to train
and educate people. I wonder if you had any ideas on educator models that might be more
effective? My own view on all kinds of gambling is, it’s a way of taking advantage of our
brain’s evolutionary history at being good at understanding frequencies but very bad at
understanding probability, so people tend to think if I flip a coin and get heads it’s more
likely I’ll get tails the next time - we look at frequencies. So is there a way that we can
train people that would help undo the harm of the lottery? And in that characterisation
being one risk among others, and what you’ve said makes sense and I can understand it,
yet the risks are inherently different because the lottery is loaded for you to lose whereas
presumably the other risks you’re taking are loaded for you to win on a long-run average,
otherwise you wouldn’t be taking them. So, is it a kind of bounded rationality at work
here, or is there something else that I’m missing about the way people perceive and
understand their risks?
I also wanted to know whether there has been change over time? We’ve had the
lottery for ten years. I was doing some work recently on the mainstream casinos where
there is a remarkable shift that’s happened through the current recession. Defying all
predictions, the volumes in mainstream casinos have actually plummeted quite
dramatically. We used to believe that casinos were non-cyclical spending, they’re almost
like cigarettes: people gamble no matter what. Yet in this recession that has been
disproved because we have seen dramatic declines in revenues of the Sun Internationals
and Goldreef Cities and so on. I wonder if something’s happened that’s comparable to
that at the level of the National Lottery? Our theory in the work that we’ve done is that
there’s been a kind of social learning and maturation that’s happened around casinos.
When they first hit South Africa most South Africans had never come across these, they
were the glamorous things that we saw in cigarette ads, or we heard about happening at
Sun City outside of the ambit of the apartheid machine. Then suddenly we had this: part
of our freedom dividend was to be able to go and gamble. And a decade and a half later
there’s been this maturation where people are much more conscious of the social harms
of gambling, and people in their own behaviour have become much better and more
responsible in the way they do it. So through the current recession that fact that we’ve
seen a decline in gambling acts as supporting evidence to say, well, people are actually
3
behaving rationally here, they’ve got shrinking incomes so they actually are shrinking
consumption of gambling. I was interested whether there’s anything like that in the
lottery sphere?
There are my thoughts and questions and I hope they provoke some discussion.
4