A Run on the Omusati Savings Co-operative
Omusati Region, Namibia. A savings and credit co-operative has 340 members. Its balance sheet shows members' deposits of N$4.8 million, members' shares of N$0.6 million, loans to members of N$4.3 million, cash and bank balances of N$0.35 million, and other assets of N$0.75 million. Most loans are to crop farmers and are due after the harvest in four months. A false rumour that the co-operative has lost money spreads on social media. In ten days, 90 members withdraw N$1.2 million and cash falls to N$0.15 million. The co-operative cannot legally recall loans before the agreed date and cannot sell the loans quickly. The Bank of Namibia will lend against good collateral at 12% a year; a commercial bank offers an overdraft at 18% but only against the co-operative's office building. The annual general meeting is in three weeks and some members want to wind up the co-operative.
1. Distinguish liquidity from solvency using the figures. Calculate the liquid-assets ratio before and after the run and explain the immediate problem.
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Liquidity is the ability to meet withdrawals and payments as they fall due. Solvency is whether total assets exceed total liabilities, so that the institution has positive net worth. A body can be solvent but illiquid if its assets cannot be turned into cash quickly without loss.
Before the run, liquid assets were N$0.35 million against deposits of N$4.8 million, a ratio of 7.3%. After withdrawals of N$1.2 million, deposits are N$3.6 million and cash is N$0.15 million, a ratio of 4.2%. Measured against the original deposits, the ratio is 3.1%. Both are low for an institution that promises members access to their savings.
On book values the co-operative still appears solvent. Assets are loans N$4.3 million + cash N$0.15 million + other assets N$0.75 million = N$5.2 million. Liabilities are deposits N$3.6 million + shares N$0.6 million = N$4.2 million, leaving net assets of N$1.0 million. The immediate problem is therefore liquidity, not solvency: the loans are sound in principle but cannot be called in for four months. If members keep withdrawing, the co-operative will have to sell assets at a discount, and a liquidity problem could become a solvency problem.
2. Recommend a response plan, evaluating at least two options. Consider cost, member confidence and moral hazard.
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To restore a 20% liquid-assets ratio against remaining deposits of N$3.6 million, the co-operative needs N$720,000 in liquid assets. It has N$150,000, so the gap is N$570,000.
Option one is a Bank of Namibia loan at 12%. Interest on N$570,000 is about N$68,400 a year, the cheapest option, but it depends on acceptable collateral and may take time. Option two is the commercial overdraft at 18%, costing about N$102,600 a year and secured on the office building. It is faster but risks the building if the co-operative cannot repay.
The response should be sequenced. First, borrow enough to meet ordinary withdrawals, preferably from the central bank. Second, issue a clear statement with the audited position and a temporary, published withdrawal limit, so members can see that loans are performing. Third, ask the board to review why the rumour was believed and to publish monthly liquidity figures.
Moral hazard is real: easy central-bank support may reward poor liquidity management. The loan should therefore carry conditions on governance, reporting and a rebuilding plan. Winding up should be rejected while net assets are positive, because a forced sale of loans would destroy member value.
3. Explain how a run can make a solvent institution fail, and identify one prudential measure that could reduce this risk.
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A run is self-fulfilling. Each member withdraws because they expect others to withdraw. Even if the loans are good, they mature in four months. To pay early withdrawals, the co-operative must borrow at high cost or sell loans at a discount. The discount reduces net worth, which makes remaining members more anxious, so more withdraw. A solvent institution can thus be pushed into insolvency by the cost of fire sales, not by bad loans.
The rumour started on social media, so communication is part of the solution, but regulation is also needed. A minimum liquidity ratio, such as holding 15% of deposits in cash and near-cash assets, would give the co-operative a buffer. Deposit insurance, up to a limit, would reduce the incentive for small savers to run. Regular supervision and public reporting of capital and liquidity would make false rumours less credible. The measure must be enforced before the crisis; a rule introduced during a run is too late.