What is the bank’s mandate?

Why does the bank exist? The founding mandate of an organization plays a critical role in determining its strategy to execute that mandate.

Strategy Study W0 3

The bank’s mandate

The 1st consideration is important but largely ignored in most studies. Looking at the mandate is especially important in any entity with partial or complete state ownership.

What is the bank’s mandate? Why was it created? And, obviously, how does entering the US market help the bank fulfill its mandate?

The bank receives money from a national government and the government is their majority shareholder. What does the government want from their investment and from the bank?

Is this expectation explicitly captured in the bank’s founding articles of incorporation or national law that governs the client?

They are a quasi-state-owned bank working with large private sector equity investors. Which investor’s needs take precedent?

Ultimately, the success of the bank is determined by its ability to meet the written expectations set up during its founding. We need to be vigilant about this and ensure that anything that takes them away from this goal is not pursued.

What is the text of the mandate?

Cursory reading of the banking founding legislation indicates the client is governed by a legislative mandate, which requires them to:

(1) Earn a return greater than or at least equal to inflation.

(2) Increase employment in the country.

(3) Increase job creation in the country.

No matter where we go with the analyses, we need to be guided by the mandate of the bank. We obviously need to validate this by getting a copy of the original articles of incorporation and the bill that went through the Senate.

A simple reading of the situation would say entering the US market does not help the bank create jobs in its own market so it should not do it.

Unfortunately, the situation is not that simple. That brings us to consideration 2, cross-subsidization.

Cross-subsidization

There are two ways to look at this.

(A) Is the client, LAB, unprofitable in their current business and/or markets and, therefore, want to enter a foreign country and charge higher fees to generate higher returns and bring this money back to Latin America to cover their losses?

This is not implausible. If the banking client needs to create jobs in Latin America and this critical need is forcing them to incur losses, they would need to offset it somehow.

Otherwise, they would need government funding in perpetuity to offset the losses from entering markets with low to negative returns.

The Industrial Development Corporation (IDC) did this in Mozambique when they funded smelter operations, by requiring higher returns than they could get in their home market. It is a very common strategy.

Yet, the IDC issue was slightly different, which brings us to option B.

(B) Is the client, LAB, profitable in their current business and/or markets but unable to extract higher returns due to their social mandate of job creation, and therefore wants to enter a foreign country and charge higher fees to generate higher returns and bring this money back to Latin America to do more good work?

The ethical issues

Again, this is a very plausible option. This is the IDC situation and a common strategy used around the world.

But there is a wrinkle. Do you see the problem with Option A above?

If a Mexican national, for example, crosses the border to work in the US and remains a Mexican national, and US resident, should LAB charge him/her higher interest rates for a loan merely because he/she is based in the US?

Is it ethical?

Charging higher rates in a different market to generate higher returns is done by many state-owned entities, like the IDC. What happens if the higher rate is charged in a different market to citizens of the country where the state-bank is located? Is that ethical or even allowed?

And if they charged the higher rate, they would probably get away with it because the borrower has few alternative choices, but is that not exploiting the borrower?

There is very little precedent for this. In fact, quite the opposite is true where Chinese-specialist banks serve Chinese nationals or the Chinese diaspora across the world but at a lower rate.

What about Mexican’s who borrow money and create businesses in Mexico? Are they treated differently? Do they get a lower rate? How would LAB reconcile these differences?

Would they need to borrow the money while in the US to get the higher rate? If this happened would’nt people just borrow the money in Mexico and take it across the border?

Is it our job to figure this out?

Why couldn’t LAB charge a lower rate in the US but lower their cost structure so their margin goes up?

This is definitely an area the team needs to consider and some of the tough decisions we need to make.

Understanding the lives of immigrants

It is worth remembering the quote from Emma Lazarus etched into the tablet on the Statue of Liberty.

Give me your tired, your poor,

Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, and tempest-tost to me,

I lift my lamp beside the golden door!

My final note is an important reminder. Since, we personally want this banking client to succeed so much, we need to take the opposing stance and play devil’s advocate.

We need to prove this will not work. If we are wrong, everyone is happy because everyone wants this to be done. The client thinks it is a no-brainer and the press loves stories about serving the unbanked. However, the client could go bankrupt.

If we are right, we saved the banks’ capital, but probably upset a lot of people.

Bias is no friend to a consultant.

We need to be right irrespective of our personal preferences.

QUESTION(S) OF THE DAY: Why do you think LAB is entering the US market? Due to issue A or B above?

We answer this question, additional reader questions and discuss more issues raised in this article on the accompanying episode on the Strategy Skillspodcast channel on iTunes, Spotify, Acast and Google Android Podcasts. This is the world’s #1 ranked business strategy podcast channel.

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