A cash deposit in a bank is virtually an unsecured loan to the bank, with no assurance that your money is safe and easily accessible. To make it worse, the bank determines the terms and conditions for such a loan.
When you deposit money in a bank, you surrender the legal title to the cash and it becomes the bank’s asset. As a result, you become an unsecured creditor to the bank. That is, the bank doesn’t give you any security as protection in case it defaults.
Banks insure cash deposits with a government entity to ensure the safety of your funds. In the United States, for example, the Federal Deposit Insurance Corporation (FDIC) guarantees up to $ 250,000 per person per insured bank. The insured amount is much lower in smaller economies. The Kenya Deposit Insurance Corporation insures up to $ 4,279 per person per bank in Kenya.
In the event of a collapse, depositors are entitled to the amount specified by their jurisdiction’s deposit insurance entity. This implies that the traditional notion of depositing money in a bank for safekeeping is incorrect. Banks use your cash deposits for high-risk ventures and only keep a small portion of them available for withdrawal.
Between 2015 and today, three Kenyan banks have collapsed. They are Dubai bank, Chase bank, and Imperial bank. Most people are unaware that when a bank fails, depositors are not prioritized. Assets recovered from a failed bank are used to pay employees’ outstanding salaries, the government’s outstanding taxes, and secured creditors before paying cash depositors. The dissolution process could take months or even years.
Whenever a bank run happens — an event where a large number of depositors make large withdrawals within a short period of time, often in a panic — commercial banks can limit withdrawals to a certain dollar amount per day. This means that depositors aren’t guaranteed to access their money on demand.
If you live in a relatively stable economy with functional systems, the fear of not being able to access your money on demand is minimal. In most African countries, you need immediate access to your money to deal with emergencies such as hospital admission. Yes, before admitting a patient, some hospitals require a cash deposit. If your bank’s ATMs run out of cash and you have no other options, it could be a matter of life and death.
In February, when Russia invaded Ukraine, there was panic as thousands of Ukrainians rushed to the banks to withdraw their deposits and use them to flee the war. Some ATMs ran dry and people were forced to use cash at hand and their Bitcoin holdings to fund their travels.
According to Bitcoin Mtaani, an African startup translating Bitcoin content to African languages, youthful Africans have no business giving unsecured loans to commercial banks. Instead, they should become their own banks by converting their cash to Bitcoin. With Bitcoin, they can always access their cash on demand.
The terms of the “unsecured loan” to banks are not favorable. If you were to lend your money directly in the market, you would demand a competitive interest rate that includes the inflation charge for the loan term period. When compared to the amounts paid to shareholders, the interest rate that banks pay on savings accounts (their unsecured lenders) is pennies.
If you consider money to be a technology for storing and transferring value over time, you will realize that fiat money has failed this purpose because the value stored erodes over time due to currency devaluation. So, if you decide to give an unsecured loan to a commercial bank for safekeeping with the expectation of annual interest, you should be aware that there is a better technology for storing and preserving value that does not require you to give another party control of your money. That technology is Bitcoin. Though volatile, it has increased its holders’ purchasing power over the last 12 years.
To access your money in your bank, someone would need to steal your ATM card, PIN, and passwords. Bitcoin provides a similar level of security without requiring you to hand over ownership and control of your money to a bank. A thief would need access to your private keys, PIN, and passwords for your Bitcoin wallets in order to steal your Bitcoin.
Banks are mostly inaccessible in most African countries during the times when you need to access your deposits. This includes public holidays and medical emergencies that occur at night. Your banking app will frequently hang, and credit card payments will frequently decline.
Giving an unsecured loan to a commercial bank may give the impression that they will be first in line when a credit facility is required. No, the government takes precedence.
The government is the most important customer loan for commercial banks. Homeowners with mortgages are arguably number two. Before considering individual savers, banks consider lending out deposits to corporations.
If you are fortunate enough to obtain a bank loan, they will classify you as having a relatively high risk and will charge you a higher fee when compared to the government and large corporations.
The Bitcoin ecosystem is developing and it allows people to store value, transact, and access other financial services without giving unsecured loans to banks that don’t prioritize them.
Disclosure: I own bitcoin and other cryptocurrencies.