The World's Weirdest Financial and Payments System
Can you guess which country it is?
I visited a few countries over winter break, one of which has the weirdest financial and payments system in the world. In this post, I’m simply going to *describe* the country without naming it, so you can try and guess which it is.
I’m not going to say why this country is so odd, that would require its own separate post. I’m just going to show that the country is, in fact, deeply odd. Hopefully, you’ll get some laughs along the way, because what follows is absurd →
In this country, loans are (basically) illegal
Credit is the lifeblood of market economies in both advanced and emerging economies. Loans and credit fund a large share of almost every balance sheet, especially for larger, mature businesses. But in this country, most kinds of structured lending have been outlawed. Credit card debt, mortgage debt, corporate loans and car loans (etc) don’t really exist.
Why? Banks are required to keep 73% of deposits in the central bank as reserves, compared to 12-18% in most places. This is by far the highest reserve requirement ratio in the world and it makes money lending extremely costly and capital inefficient for banks, so they don’t do it.
To further discourage lending, regulators require banks to link the interest rate on loans to the performance of the local currency against the dollar. Borrowers end up paying a floating interest rate of something like LIBOR + a spread + the cumulative FX depreciation since the start of the loan. This makes interest on loans high and volatile1.
As a result of these policies, credit isn’t a material part of the economy and banks have to earn revenue from fees (not interest). Capital intensive activities like real estate, manufacturing and natural resource extraction are just about 100% financed with equity and reinvested earnings, rather than debt.
Retail payments are a nightmare
In most countries, payments aren’t complicated. You just use cash or a card or scan some QR code with an app. Payment methods aren’t something most people worry or even think about, even in America where they’re famously bad. It’s all abstracted away because the systems work.
But in this country, payments are deeply dysfunctional and fragmented across a variety of methods. If you want to buy Doritos at the airport, you can pay with:
Local currency cash (though bills are scarce and denominations are tiny)
Dollars cash (if the shop has change; often they don’t)
Local currency debit card (if the ‘system’ is working)
Instant bank transfer in the local currency (if the shop has it set up and you have enough cell service to load apps)
International debit/credit card (if they have the right POS machines; you get the central bank FX rate though, not always the real FX rate)
Zelle (the American p2p instant payment product) if both the shop and you (or a family member) have a working US bank account. Paypal is also used in the same way, but is less common.
In some cases crypto (almost always Binance pay, if both you and the seller use Binance).
There's always a little suspense: will this shop accept any of my payment methods? Will I be able to buy the Doritos?!
Banking services in dollars are … unusual
Countries with their own sovereign currency often also offer bank accounts in dollars. These dollar accounts can be funded with USD purchased domestically or with a wire transfer from the US and can also typically wire balances to the US.
Our country also has USD accounts, but with a catch: they’re cash-only. You can’t fund a local dollar account with a wire from the US; you can only open one by literally depositing physical USD cash. With few exceptions2, all the bank does is lock the cash up in a vault and return it with no interest when you withdraw. The ‘accounts’ are more like security boxes than banking products.
If you want to send your dollars cash from domestic bank A to domestic bank B, you can’t. There’s no central clearinghouse to net out USD transfers across banks. You literally have to withdraw a suitcase of dollars from bank A and haul it to bank B yourself. You can only do internal ledger transfers in USD with other people or businesses if they use the same bank.
Worse yet, if you want to wire your USD balance to Bank of America (or any other US bank), you’re out of luck. Banks in this country don’t have correspondent banks in the US, so transferring your cash dollars into and out of the American financial system is impossible, except if you are comfortable —>
With fraud or fraud-adjacent activities
In this country, there are financial conglomerates (and multinationals) that have both actual dollars in America and physical USD cash in-country. For a fee of about 5%, they will wire you dollars in the US in exchange for domestic USD cash, or vice versa.
They’ll create an invoice for a (made up) service to justify a wire transfer in America in exchange for your cash in-country. People often use these services for perfectly legitimate reasons (like paying for medical services abroad), but sometimes it’s just money laundering.
People call the practice of exchanging USD cash for deposits in American banks “bankarizing” the cash. In other parts of the world, it’s called Hawala. It’s an AML/KYC nightmare for US banks, which partly explains why they’ve been closing accounts for firms and people from this country en masse, even if they aren’t legally required to.
Foreign currency is bought and sold on Instagram, Whatsapp or with your cousin’s dentist, who moonlights as an FX trader
In most countries, dollars and local currency are bought and sold at a bank or a specialized FX service, like Transferwise. In this country, banks can’t do FX (since it’s legally dubious and they don’t have correspondent banks in the US), so currency trading has spilled into the non-bank financial sector and informal economy.
Big corporations work with professional FX desks, but mom and pop trade in the wilderness of Instagram and Whatsapp with wannabe FX brokers, some of which make spreads as wide as 15 or 20% (obscene for currency trading). There’s total opacity over prices and volumes and it’s all unregulated, so fraud is common. Clients running amateur FX desks from their US checking accounts is obviously a compliance nightmare for American banks.
Not surprisingly, crypto exchange Binance’s p2p marketplace for local currency against synthetic dollars (USDT) has gained respectable market share3.
The central bank does monetary policy in cash
In countries where the currency floats, central banks often influence the value of the local currency against other major currencies by buying and selling dollars (or Euros, Yuan, etc) on the open market4. All these open market operations happen over Bloomberg chats and professional, electronic FX trading desks.
But this country’s central bank doesn’t have bank accounts in the US, so it attempts to stabilize the value of the local currency by selling physical USD cash. I can’t quite convey how absurd it is, other than by inviting you to imagine teams of central bank employees in vans lugging suitcases of dollar bills to sell in an informal distributed FX market. It’s absurd.
I could go on, but I’m sure that by now, someone in the comments section can guess what country this is. And if not, here’s a clue that should have been obvious: the country is heavily sanctioned by the US and Europe, which is why it doesn’t have correspondent banks. And if that’s not enough, here’s another clue: It’s not Cuba or Iran, but the country is great friends with both.
This policy is designed to make it expensive / impossible to borrow local currency and speculate against it (i.e. to sell local currency short) because the gains from FX depreciation are wiped out by higher interest payments (from FX depreciation).
A few banks will offer debit cards linked to these USD cash accounts. They work with the (mostly) uncompetitive central bank FX rate, though, not the floating black market rate. These debit cards aren’t very popular.
The positives are that Binance p2p has a transparent orderbook, competitive prices, fast response times from sellers and a reputation system that lowers the likelihood you are doing business with a scammer. The downsides are that crypto on/off ramps to real US dollars are expensive or annoying or both and that USDT isn’t easily exchangeable for USD cash, which is important for payments in this country.
This is informally known as a ‘dirty float’ FX regime.