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Going through the hoops with the support of the financial system: The Story of Jan Sarkis

Martin Melecky's picture

The following post is a part of a series that discusses 'managing risk for development,' the theme of the World Bank’s upcoming World Development Report 2014.

A composite story based on prevailing business practices

In January 1990 after the Velvet Revolution, Jan Sarkis, the son of a Greek immigrant in rural Czech Republic, decides to start a business to produce bottled juices. To obtain needed machinery and funds for working capital (fruits, containers, bottles, etc.), Jan takes credit from a local bank. He had heard from the locals that the region used to experience periodic floods. Although Jan hasn’t experienced any himself, he still buys flood insurance from a reputable insurance company.  In the 90s, rural Czech Republic was prone to thefts and burglary. So, Jan decides to protect his savings by depositing them in a bank. Good times settle in Czekia, and Jan’s business and the country begin to boom.

In 1997, the boom comes to a sudden halt and the Czech Republic faces a banking crisis. Jan’s credit is unexpectedly re-priced and he is asked to repay 40 percent more each month. Moreover, Jan’s savings are frozen as the bank he had trusted goes into bankruptcy. The one third of his savings that he receives belatedly, thanks to public deposit insurance, doesn’t do much to sooth his anger towards the banks and politicians. Jan decides to be self-reliant and limits his interactions with the financial system. His business stumbles. 

As if this was not enough, he faces another setback. In 2002, the Czech Republic is hit by one-in-hundred-years flood. The area where Jan lived was under water and his business gets swept away. Jan’s dreams are shattered. But his insurance contract gives him hope. He claims for the damages and gets a speedy reimbursement of virtually the whole claim. He rebuilds his business and recovers, but Jan’s mixed feelings about the financial system do not go away.

In 2006, the Czech National Bank, a strong and credible public institution, becomes the integrated supervisor of financial services. Public confidence in the financial system rises. Jan decides to take another credit and consolidates his savings under one bank account. Right when he was willing to trust the banks again, the 2008 financial crisis hits the world. The Czech banking system is, however, well prepared, thanks to conservative financial supervision conducted by the Czech National Bank.

Hit by the declining German demand for exports, the Czech koruna keeping its flexibility depreciates to absorb this shock and make Czech exports more competitive. As a result, imported goods, including drinks, become more expensive. Jan sees an opportunity and takes a risk. Relying on his credit, he expands his business by introducing a new sparkling drink.

The drink is a success! Jan is, however, worried about putting all his eggs in one basket, and wants to protect his wealth. Mindful of past shocks and possible future ones, Jan decides to take his company public and launches an initial public offering (IPO) for his business at the regional Warsaw Stock Exchange. The IPO is well received and even oversubscribed. Using the proceeds from the IPO, Jan could now diversify his wealth by buying stocks and bonds of other companies that he had researched and followed for some time. Because of his strong spirit and wise decisions, and the financial system to support them, Jan is now a wealthy and respected man, focusing on giving back to the community.

The ups and downs of Jan Sarkis’ story demonstrate that only by providing useful risk-managing tools and keeping its house in order, can the financial system fulfill its socially beneficial risk management function and better position people to pursue opportunities.
 


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Comments

Submitted by Nachiket Mor on
This is an excellent case study and I am glad that the author presents it as a composite life cycle story. There is clearly the message, as the author points out, that there is much to be gained if countries run robust financial systems. However, to me there is another message embedded in the story as well -- that financial products in which the individual takes a risk on the financial system need to be held by well diversified and well capitalised national institutions while those in which the reverse is true (such as credit) can be dealt with by local financial institutions. A number of financial systems and financial strategies (including those supported by the World Bank) seem to be doing the opposite -- allowing savings and insurance to be managed by community institutions (such as self-help groups and village savings associations) while they are turning to national institutions for credit.

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