Once upon a time there lived a little girl called little red riding hood. For some reason she would not be seen anywhere without her hood, and therefore everyone forgot her name and just called her “red”.  Red killed the wolf and the reason for this lay in an apple tree that Red frequented.

One day the wolf got into his head that he would charge Red and all the villagers for watching over the tree. Soon it was over every apple and later the whole forest’s access was charged. If he could find a way of making money off the villagers, he would. One day Red snapped, no one saw it coming, but the sweet little girl hacked the big bad wolf to death.  That’s really how Red Riding Hood’s story went.

Every other version is a lie.

Seriously speaking, if I you did not know that I was talking about banks there, I do not know what to say to you. So here is a class on banking for all those who don’t know about banks.  A bank is an institution or a financial establishment that invests money deposited by its customers, pays their customers when required, and gives loans at interests and exchanges.

Banks or the concept of banking began centuries ago in the ancient worlds and was referred to as the banks of the merchants. These prototypes were originally found in Assyria and Babylonia in roughly 2000BC. And they would lend merchants grains and they would later accept deposits and changed money.   Modern banking as we know it began in Italy it spread out to the rest of Europe. These guys, I must say, were the trend setters of the day I think it had something to do with their accents, I mean who can say no to an Italian? It might also have something to do with their tendency to produce crime syndicates and the sopranos.

No judgement.

How do banks work?

We all know that if we keep money for ourselves we will surely spend it (I will speak for myself here) there are people who are really disciplined in this, but I, and the oxford dictionary have a word for such people, misers.  We are therefore in agreement, banking is safer, convenient, and can store large amounts of money. Banks are also very important as they act as a link between the central bank of Kenya and Kenyan citizens. T

hey are the middle men who dole out funds for the economy and are responsible for the delicate balance of money availability. With such power comes great responsibility yet banks haven’t always been the most responsible with our money, case in point the United States situation.  They rely a lot on our trust and we do trust them with our money so it is important to know what happens to this money when we do hand it over to the bank.

When you and I hand our money over to the bank, all the money along with other people’s money goes into a large pool. This money is then used in lending to other banks and to us for stuff like mortgages, business start-up loans, school loans, car loans and the likes. All this money is, of course, paid back to the bank at an interest. This lending is said to create money in the economy which is another importance of banks. So if you thought that your money is just somewhere sitting in a safe waiting for you to come pick it up, well you are not entirely accurate. The bank uses your money for various things, one of them being making money for the bank.

How then, do banks make money? First, the rules of engagement are as follows:

a)      They talk to the Boss: the central bank of Kenya is the overall lender, they determine the interest rates and here is how it works the central bank is currently lending banks money at 11% therefore the banks take the money and lend it to you and I.

b)      The figures they come up with put into consideration the risk premium (this is what the bank looks at in case you don’t pay the money back) and profit (money they’ll make from the loan). The cheapest bank right now has a base rate of 18.5%, this is before the premiums, if you’re a Kenyan, borrowing might be expensive for you.

There are various other rules and regulations that are found in the Kenyan Banking Act that try and manage the way banks behave and some sort of accountability.  Not many would agree that banks follow these policies and even more would argue that the very policy makers who seek to regulate our banks have a stake in the profits the banks are making.

Bank activity therefore affects our economy and therefore affect your own personal finances.  They are using your money to make money and though it's unfair that you don't get a cut from all these profits it is business. Banks have been forever making money off the backs of the masses and I think it's time we did kill the wolf or at least make them accountable for what they do with our money. There only two sectors that I believe always make profits, alcohol producers and banks.

Try as the government may, trying to control these two sectors has not been the easiest thing to do. People would kill for money and would probably die for some good ale. So my biggest advice to you all is, get some shares from the big bad wolf, make some money off your money.

Get smart and don't let the big bad banks get away with it.