Pietraszkiewicz:
By : Malgorzata Halaba
The recent public turmoil over two multinationals buying up well-established Polish banks Deutsche Bank's takeover of BIG Bank Gdanski and Citibank's planned acquisition up to 75% of Bank Handlowy has once again sparked debate over the level of foreign capital in the economy, particularly in the banking sector. One of the arguments for limiting foreign presence in the banking market is that institutions owned by outsiders will always favor companies from their native countries, thereby putting Polish firms at a disadvantage when it comes to obtaining credit. Supporters of foreign involvement stress that this is the era of the global economy and it is futile to concentrate on the origin of capital. Those supporters also point out that the debate will be muted once Poland joins the European Union (EU). Krzysztof Pietraszkiewicz, general director of the Polish Banking Association, takes a more balanced view of the situation. He said that Poland should welcome foreign investment, but at the same time should try to build its own capital base. On many occasions Pietraszkiewicz, 44, pointed out that Polish institutions should promote an agenda that encourages people to save rather than spend. Recently Pietraszkiewicz talked to WBJ's Malgorzata Halaba about the ongoing debate over foreign control of Polish enterprises. Following is a translated, edited version of their conversation.
Q: The Deutsche Bank, BIG Bank Gdanski case prompted more discussion over the adequate level of foreign capital in the Polish economy. Is there a dangerous level of fore- ign capital in our economy?
A: First of all, one should approach this issue very carefully and try to avoid emotions while discussing it. We have to analyze the consequences of one model of a financial system or another; its role and its behavior in a country such as Poland. Poland is a country which, for many years, will have to use foreign savings to develop its entrepreneurship, to solve its economic and, to some extent, social problems. But also, we have to remember that Poland is a country with 40 million of inhabitants. To implement its economic programs, Poland has to use its own potential, its own resources, both material and human. So the question is: Will a financial system managed mostly by foreign investors be able to meet these goals? These goals should be looked at not just from the perspective of large enterprises, which have both domestic and foreign capital, but also from the perspective of local communities and that of small and medium-sized businesses as well as individuals.
Q: But isn't the question more of a distinction between capital from the private sector and that from the state? Because if we say yes to private capital, then we have to say yes to foreign capital as well.
A: First of all, I don't agree with this distinction between domestic and state-owned capital. Because it doesn't take into account 800 cooperative banks. For a number of years we have sustained high economic growth, but that has to be combined with building a willingness to save and invest among Polish citizens. If we don't do that, it will be very difficult to sustain economic growth in the long term, to settle external obligations. It's difficult to base the process of catching up with the West solely on foreign resources. You should build a balance where citizens and enterprises take part in the saving process and go to foreigners for capital only when it is absolutely necessary to implement economic programs.
Q: But let's come back to the banks. What's the connection between all you were saying and the level of foreign capital in the Polish banking sector?
A: Every year several hundred thousand (previously unbanked) people join the banking system. Currently, 55% of Poles state they are banking customers. Part of the population uses banks very infrequently. Such a customer needs a completely different approach from banks. So there is a question, can a typical commercial bank provide a society that previously did not have any contact with the banking sector the necessary education? Can that need best be met by a commercial bank one that has a right to choose the best customers, to address its offer only to the wealthiest, the most profitable ones? And all Polish banks have chosen this path, because of both the regulatory environment as well as competition in the sector. So we can say that the ability of Polish banks to meet this need in the present environment of privatization and increased competition is not sufficient. That the banks are less willing to build their customer base with people who are difficult, uneducated and unprepared. In other countries this problem was solved through a special system of economic regulations related to 'first contact' banks, such as saving banks or cooperative banks. And this is the problem we face, because Poland is an underbanked country, where a relatively large group of people still doesn't use banking services. Also, a relatively large group of enterprises doesn't use banking services.
Q: So how does this effect the economy?
A: In Poland, there is a relatively small banking network and a relatively small number of banking products. So this discussion about a banking-sector model also relates to the issue of meeting expectations of individual customers as well as that of small and medium-sized enterprises. Let me point out one important thing: Had the banking norms applied in many developed, free-market economies also been applied to Poland, then the level of credit issued would decrease at least 30-40%. The banks wouldn't dare carry out credit activity, not in a market with such a lack of transparency and such a low education among customers. And that's why a Polish staff has to be involved because such people understand the customer and the market better. We should remember that after joining the EU, all banks will have more freedom to activate sources (of capital). They will not be limited to tapping those in the country in which they operate. In an extreme situation, in a situation involving any kind of danger or unrest, part of the banks, not wanting to risk the foreign investment and deposits from individuals, will activate their funds on other markets, not necessarily on the Polish market. Ukraine and Russia could serve as an example of places where we could see an outflow of assets. This is not pure theory it's a historical phenomenon. This is a scenario one should take into consideration if the government is unable to regulate the flow of capital.
Q: So you mean that because we will be unable to regulate the flow of capital administratively, we need some sort of counterbalance?
A. Not so much to create a counterbalance, but maybe to make sure there is an alternative on the market. An alternative to an investor which, in the case of any problems, will say, 'Sorry, I have to reduce my activity.' An alternative in which that investor could be replaced by one saying, 'I'm ready to take a risk, because for me it's a great time for expansion.'
Q. So let's summarize. What you are saying is the following: foreign capital is fine, but it has to be balanced by an increase in domestic capital.
A. Yes! I'm sure it's in the best interest of domestic economy and in the best interest of foreign investors. Because they, in a situation of uncertainty and that happens, the economy has its cycles, has good and bad years watch carefully what domestic investors are doing. So this is the first issue. The second one is about economic policy, about creating equal or similar chances for domestic and foreign companies. Let's imagine the situation when a domestic entrepreneur who has a very good business plan, a very good project, a very good standing, goes to a bank. Such a customer, regardless who the owner is, Polish or foreign, will want a bank to extend credit and begin a relationship. Problems emerge when among the applicants are those with varying types of ownership structures. Thus, one application might come from a company funded by a country that plans to expand in Poland. Let's say the bank's owner also comes from that country. Such a company will have better contact with its bank than the Polish entrepreneur.
Q: Or so you fear. Do such things really take place? I simply don't understand why the bank couldn't just weigh the merits of both enterprises, foreign and domestic? Why can't it be a win-win situation?
A: Unfortunately, this is or-or. Usually in a disciplined economy money is a difficult-to-get good. It means that out of several or several tens of applications, banks only approve a portion. There is no question that part of the decision is based on whether the project is good, and that the level of discretion as to whether to lend to project A or B or C is really very low. But when we are talking about a range of comparable applications, there might be problems, because that's where discretion emerges. It involves the decision as to which company is chosen out of those presenting equal projects.
Q: Again, I'm asking about evidence, because I find it difficult to believe. Credit applications are not beauty contests in which you can have only one winner. Why can't both viable firms get a loan?
A.: Because the bank doesn't have money for both!
Q: But if the bank has access to the assets of its parent company abroad ...
A: But the bank knows there is not enough room for two companies (on the market)! That if it provides funds for both companies, the sale of the products will ruin the market; the companies will start to fight each other, and the bank's money will be gone! So, banking activity on the competitive market involves, at some point, the bank ensuring its actions do not destroy the market. Here's an example, the surplus of sugar in Poland. Today, the policy of the banks combined with the policy of the government support the elimination of some sugar mills and a reduction of sugar production. Policies toward coal mining are aimed at reducing coal production thus we don't have new mines opened. But certain coal mines not only get subsidies, but also loans. So the bank takes this into account, which mine will participate in the decision-making process and which one has to be closed down. And when we are talking about private companies, in areas such as electronics, furniture production, shoe manufacturing, the bank, firstly, chooses the offers but also makes decisions as to whether we are going to have five shoe producers or 15 shoe producers. So we say that if those who manage all financial resources are only foreign investors, then when we face the inflow of capital into different areas, in extreme situations, the position of comparable domestic producers will be worse.
Q: How?
A: First, by a lack of guarantees from a parent company. On the other hand, ask some Polish banks how many customers they lost when foreign banks, such as Deutsche Bank Polska or Dresdner Bank began operating in Poland. There are many examples of this, from French, Austrian and other banks. It's just natural that the ties that connect the investor in his country of origin are transferred and developed in the third country. That's how it is: Either the banks follow their customers abroad or they precede the entrance of the customers to another country. And that's fine, because this type of activity is absolutely necessary. And because several millions of companies in Poland should have a choice between different financial offers.
Q: So how does a Polish bank make this better. If 14 shoe manufacturers already exist, why would a Polish bank lend to the 15th? The market is already saturated.
A: I'm talking about a slightly different situation in which a Polish entrepreneur goes to a bank with foreign capital and at the same time faces competition from an entrepreneur from the same country of origin as the bank's. What's worrying in this case is that the domestic producer is left on the sidelines. Examples? Retail networks are the best example. Here we can see full symbiosis between banks and foreign retail networks. It isn't a coincidence that there are so many of them in Poland, obviously being credited by banks with majority foreign ownership. I'm saying once again there are fears that we will have unequal economic relationships, and I don't mean any plots, any conspiracies. But that's the common practice the promotion of these 'external' companies that expand without barriers. Another example: How do you think apple juice is produced in Poland?
Q: From apples, I'd guess. But I sense some trick here, so it's probably not from Polish apples.
A: Exactly. And to clarify: Under what slogan is it being done? The technology is such that if the producer wants to guarantee that the juice will always have the same taste, the apples have to be from the very same tree and the very same location. And Poland can guarantee the same standard. What does it mean? All these protests against accelerating globalization are due to the fact that a very rapid globalization process will destroy part of the economy. It has a wonderful impact on some, but is destructive for the others. The economy does not exist for its own sake. It has to serve other purposes, other values, such as giving people the possibility of having a good and dignified life. I don't want to demonize all these aspects, but it has to be taken into consideration. And I don't want to cause any xenophobia here. But it's just natural that the process of getting familiar with foreign capital needs some time in all countries, and the rules of communication between foreign capital and domestic entrepreneurship need some time as well. Because, as in any drastic clash of cultures, unequal treatment can lead to problems and tensions. And we shouldn't allow this to happen in Poland. We need harmony. And I think that trying to speed up certain processes is unnecessary.
Q: Coming back to this idea of a certain balance between foreign and domestic capital, what should be done, how and by whom?
A: In terms of the methods that should be used for the creation and mobilization of our own capital, we should watch how others are doing this. The methods involve a combination of the right tax structures, monetary policy and regulatory prudence. First of all, it involves applying some incentives, relatively simple, to mobilize and concentrate capital in a way that's an alternative to consumption. So, it means a system of encouraging people to save, and encouraging them to invest. One can say that there is a very good opportunity to allocate part of the funds tied up with pension funds, for instance, into the domestic banking system. But, if you don't have such a system anymore, then it's too late. I'm talking about reasonable, prudent amounts. Secondly, it's about encouraging these people who invest directly into cooperative banking, for instance. In terms of cooperative banks, I can see such a possibility, because the issue of mobilizing capital in local communities is especially important. Such a move allows small towns and villages to catch up with what we call a European level. And several instruments can be applied here, similar to those used in Spain, in the area of tax policy. Part of the income is tax-free if it's going to be used for capital to strengthen such a bank. And income for the members (of the collective bank) is also tax-free. This is an enormous power, enormous drive. In other countries, in the United States for instance, all banks have not had to and some of them still do not have to create mandatory reserves. And who does it serve? The local banks, small banks. In the States there is the so called Community Reinvestment Act, the law that requires banks to use a certain part of their deposits locally. Shortly speaking, this is an approach that says you can't transfer locally taken deposits to other locations. It's about ensuring balanced growth of the whole country.
We have to keep in mind that in the States, in addition to its capital and insurance market, some time ago decided to facilitate the development of credit unions, which provide local communities with some friendly financial institutions. And right now credit unions manage more than 25% of U.S. assets in the financial system. Banks have 28%, and credit unions 25%. In Poland, this type of activity is only symbolic, in the form of Collective Saving and Credit Institutions (SKOK). Creating conditions to develop cooperative banks and not destroy them would be more than justified. What I want to prove here is that even the most developed countries realize that a capitalist economy has to also contain fertile soil for growth.
