The construction of the Asmoconp, Associação de Moradores do Conjunto Palmeira during the mid-to late 1980s. Photo credit: Banco Palmas.
Henk Van Arkel of STRO recalled the early days of the system in the Palmeira settlement: “We put aside the money for building a school in Fortaleza, Brazil. We asked the donor, the Dutch NGO ICCO, to be patient. The school would get built, but instead we planned to first put local currency, called fomentos, in circulation in the form of microcredits backed by the donor money in the bank. At the start, nobody knew what fomentos were, but the Banco Palmas reps asked people, mostly vendors, who were getting these loans to put signs in their windows saying, ‘Fomentos accepted here.’ Notices were very quickly all over the place. Then Banco Palmas went to builders and asked them to accept payment in fomentos. By then, it seemed that fomentos could be spent everywhere in the neighborhood, so they agreed. When the builders started work on the school, the fomento process basically tripled the effect of the original development aid package.”18
João Joaquim de Melo Neto Segundo, founder Banco Palmas, Brazil. Photo credit: Banco Palmas.
The first Banco Palmas bank opened in January 1998 and issued two kinds of loans. One was consumption loans, with no interest fees and just a 1 percent flat fee for administration. These loans were given in the local currency, called Palmas, and were not convertible into national currency. In the neighborhood town, Fortaleza, for example, there are 240 businesses that accept the local currency and even offer discounts of between 2 and 15 percent to people using it.
“The process for getting a loan is very simple,” added Asier Ansorena, Asesor Nacional de Crédito do Instituto Palmas.19 “For a business, there is no need for a business plan. There’s simply a meeting with a bank officer to discuss the idea for the business, and this is followed up by finding out about the person’s reputation for reliability in his or her neighborhood. Thereby an assessment is made of the individual’s trustworthiness to repay the loan. The process is much easier still with consumption loans. Someone in need of some short-term money to put food on the table for their family can make their case and walk out of the bank with the money.”
Consumption loans, which used to be called emergency loans, range from 20 to 100 reals, equal to about $50 at most. They ensure that nobody goes hungry. Production loans can also be provided in national currency, in which case they come with an interest fee attached to them. Production loans typically range between $5,000 to $10,000.
Interestingly enough, in 2003, after issuing the first Palmas currency, Joaquim Melo was accused of running a money-laundering operation in an unregistered bank. The Central Bank started proceedings against him, charging the bank with issuing fake money. Following a court case, the judge presiding agreed that the people were constitutionally entitled to have access to funds, as the Central Bank was doing nothing for the poor areas. The Central Bank created a working group on how to help the poor and invited Melo. In 2005, the Brazilian government’s Secretary for Solidarity Economy created a partnership with the Instituto Palmas. Support for “community development banks” issuing new currency is now official state policy.
In 2006, Banco Popular do Brazil, the largest public bank in the country, became a partner of the Brazilian Network of Community Development Banks (CDB), a guarantor of credit lines based on the criteria from PMNPO (National Program of Oriented Productive Microcredit). The CDB estimates that this microloan program had an impact on the lives of more than 200,000 people. There are currently 78 community banks.
Banco Palmas has created over 1,800 jobs and sparked the creation of similar dual currency banking already operational now in some 66 communities around Brazil with the full support of the Brazilian government and the nation’s Central Bank.
FROM HUMBLE BEGINNINGS
Aurineide Alves Cordeiro, a resident of Conjunto Palmeira, asked for her first loan of less than $100 more than 14 years ago. Today, she is a very successful local businesswoman working her way up from the bottom with help from Banco Palmas.
“Any person of low income that visits a conventional bank to ask for a loan is highly likely to have his or her dreams crashed in an instant, mostly because the barriers of entry developed are highly bureaucratic. There tends to be a lack of interest in serving the poor, or there’s a complete disconnect between the priorities of the banking system and the real economy. Banco Palmas has always fought against the barriers that kept people in the poverty trap,” explained Aiser Ansorena.
Aurineide’s story is full of struggles. She can easily remember the difficulties she and her family experienced during the days before Banco Palmas existed.
“I always worked as a saleswoman. Before the bank opened, I would sell anything I could to stay afloat, mostly clothes. Since the creation of the bank, the neighborhood has grown a lot, and not only economically. Any problem we had, we would run to the bank to try to find a solution. We are privileged to have a Community Bank in our neighborhood.”20
Aurineide used her first loan to buy clothes, mostly women’s underwear from a textile plant, which she then sold door to door. “Every time I finished paying for a loan, I would ask for another one; I continued this process for four years, until I was able to start my own clothing store.”
From 2002 until 2009, Aurineide worked in her own store, which she was able to build thanks to the support she received from the bank. Five years ago, she embarked on an even more ambitious enterprise; she opened, together with her husband, a DYI building construction warehouse. For two years, they had to manage both businesses until they could successfully transition to the construction business. Her line of credit is now $7,500.
Aurineide gets emotional as she tells her story, especially when she has to explain what Banco Palmas means to her. “We had no access to credit or any other financial service in our town. Thanks to our Community Bank we have managed to have access to these services. Personally, this has been of tremendous importance. Every time I needed help, people at Banco Palmas were always ready to provide it.”
“Our plans are to create 1,000 banks in the near future, of which 300 should be in the northeast of Brazil, and to have at least one community bank in each state of Brazil. Furthermore, we’d like to help spread this community banking network across Latin America. There is a pilot project to use mobile telephones to facilitate transactions, along with a major push to help in financial education,” added Segundo.
Interestingly, there are two regions in Brazil where the network’s local currency is used to pay part of government employees’ salaries. The first is Silva Jardim in the state of Rio de Janeiro. Employees are paid in Capivari operated by the Banco Capivari. The second is in the town of São João do Arraial, located in the state of Piauí. The local bank is Banco dos Cocais and people are paid in Cocais.
JAK BANK
JAK (Jord Arbete Kapital) stands for land, labor, and capital in Swedish and Danish and was founded to provide interest-free banking services. There exists a loose network of several cooperative banks in Europe located primarily in Finland, Denmark, and Sweden, and lately in Germany, Italy, and Spain.
The loans are financed solely by members’ savings. No money is made by the bank for providing these loans, nor is money made by the banks’ customers on their savings with the bank. In a nutshell, the bank does not partake in the traditional banking practice of money creation. It’s a cooperative, so the bank’s clientele are shareholders, with each depositor holding just one share. Each member has equal influence in the annual vote for the board of directors.
JAK’s ultimate goal is to see the abolition of interest as an economic instrument and replace it with instruments that better serve the interests of people. The bank’s mission rests on offering feasible financial instruments sustainable for the environment and serving the local economy.21
Unlike regular banks, JAK doesn’t rely on external capital. Government regulations ensure that the bank must hold adequate reserves of its own capital. On the fac
e of it, the way to do this would be to build up reserves out of company profits. Defaults on JAK bank loans are rare, approximately 1 percent, and significantly lower than those experienced by mainstream banks. Low losses mean also that costs to the members are kept low.
“Savings points” are the cooperative currency internally used as the key method by which JAK manages member savings and loans, thus increasing its liquidity. Saving points are awarded for one’s saving efforts. For example, saving one Swedish crown for one month yields one savings point, and one crown borrowed for one month consumes one savings point. Thus savings points are used to ensure the sustainability of the system. Savings points are earned by the member on savings that accumulate prior to exercising the loan option and on savings accumulated during the loan repayment period.
“The types of loans we make are usually for home improvements such as renovations or to purchase real estate. We usually are able to provide funding for the entire mortgage for properties in rural areas in comparison to providing approximately half the funds needed on a city property. This is because a house, for example, tends to be less expensive in more remote parts of the country in comparison to major cities, such as Stockholm and Malmö,” reports Miguel Ganzo, international relations coordinator for JAK. Loans to pay back student loans are also given.
Oscar Kjellberg, who retired in 2010 as head of the bank, remarks, “This system works really well, over the years, for people wanting to buy a house. Some 80 percent of our loans historically have been for that purpose. An individual must save with the bank, with his or her money being used for someone else’s loan first. Then we provide a house loan, which typically gets paid back over a 15-year period. But before the bank will hand back the deeds to their house, they have to carry on making the same monthly savings payment for another 12 years after their loan is paid off, to give other people the use of their money. After that, they can withdraw their money if they wish. The benefit to the depositor is that they have good lump sum available for their retirement. With conventional banks, that sum would have been swallowed up by interest payments.”
A Bank without Tellers
Some 32 professional staff members are based in three offices, the main one located in Skvöde, Sweden, roughly 180 kilometers outside Stockholm, and the other two branches are located in Malmö and Orsa. All business is transacted by telephone, Internet, or e-mail through a state-of-the-art computer system. The enterprise is supported by 700 specially trained volunteers who sustain JAK’s 22 regional communities. These volunteers provide word-of-mouth publicity as to JAK’s benefits and array of services, along with using social media, especially among the younger volunteers.
JAK Bank regularly offers classes to their members. Here, three women students who have completed basic training attend an advanced lecture on how loan officers evaluate a potential loan. Photo credit: Amanda Svensson.
The bank currently has plans to install a system that will offer bill-paying services to its customers, including the possibility of cash withdrawal, which brings the bank closer to becoming a full-service bank.
Kjellberg continued, “The trust in the system depends not only on the borrowers but also on the management. They have to balance the interest of the savers, the borrowers, and encourage cooperation among all members. It takes time. The other side of the savers in a savings-and-loan system is the borrowers. Their record as borrowers is a factor of major importance for the trust of the savers, who are saving with the explicit purpose of getting a loan themselves. It is not as bad as it sounds, because the borrowers are earlier savers, just as the savers will become borrowers later on,” he explained.
JAK reached 36,300 members during 2010, with an overall 12 percent yearly growth rate. During the same year, members’ savings amounted to 111 million euros, of which 99 million euros were granted as loans.22 Their loan default levels are very low on average: 0.03 percent in 2007, and in 2010 there was no default during the whole year.
In the meantime, Kjellberg looks to new horizons. “I have been very interested in the topic of venture capital and looking at new ways of providing access to money, especially for new business ventures. From my experience, risk is mitigated, although never totally removed, by knowing the players involved. So I am looking at new models of funding local enterprise through crowd financing,” he added.
There has been a solid push in recent years to reach out to other countries internationally. According to Miguel Ganzo, “There are projects underway to establish the JAK model in Germany, Spain, Italy, and Finland. The JAK bank in Denmark was established in 1931 and is totally independent from us. It started off strongly, then went through a period of decline, and is now on the rise again. There is also interest from Arab countries because our model respects traditional Shari’a principles.”
In terms of the overall good of the Swedish economy, the JAK bank does have a positive effect on unemployment, but in an indirect way. “As JAK liberates more people from interest expenses, that much money is freed up which can be used instead to buy goods and services. This will stimulate businesses so that they can employ more people,” according to a report by a Canadian consultancy group.23
THE FREE LAKOTA BANK: A COMMODITY-BACKED BANK
The Free Lakota Bank is another interesting case study. Although it works with conventional money, it is very different from conventional banking standards in that it is the only nonreserve, nonfractional bank in the United States and possibly the world that issues, accepts for deposit, and circulates monies that are compliant with the American Open Currency Standard (AOCS) and uses bullion of 0.999 percent fine silver and gold. All of the bank’s deposits are liquid, meaning they can be withdrawn at any time in coins.
The AOCS currencies include Boulder Gaians, John Galts, Dixie Dollars, and Coin of the Realm. These privately issued currencies are backed by some precious metal, most commonly silver.
According to Eddie Allen, director of the Free Lakota Bank, “This movement has been envisioned by many for some time. Several years ago, the OPEC nations began to openly speak of moving away from the dollar to a basket of less volatile currencies; China and Russia among others are now engaging in international trade in their own currencies rather than using the dollar. Now it is openly speculated that national leaders of oil-producing countries who have tried requiring payment of their oil in something other than dollars (e.g., euros or gold) are meeting sudden and undesirable ends. As nations scramble to find new paths to protect their interests, it is expected that they, too, may ultimately reach the conclusion that: Promises to pay are not payment. And yes, this path is being taken by numerous entities in other countries—there is even an international commodity banking association in formation as we speak.
“The power and profits gained by those who own and operate the current banking system are significant. Those who create and manipulate paper currencies have quite an impressive global network of support and beneficiaries who rely on the fiat, debt-based system continuing, and thus it has successfully been propped up for quite a long time. Add to that the power of the well-lobbied state reinforcing and exercising considerable influence to the benefit of those who engage in that style of banking.”24
The Free Lakota Bank is not affiliated with any government agency and does not recognize the authority of any such organization. “Private insurance companies are more than capable of providing sufficient coverage to our holdings without burdening anyone outside of the principles of the contract, such as the American taxpayer,” Eddie Allen remarked.
THE BRISTOL POUND: OUR CITY, OUR MONEY, OUR FUTURE
The Bristol Pound (BP) is both a paper and an electronic currency and is emerging as an interesting example of a trifecta of mutual support among the currency, a local bank, and local government. Payments can be made in cash, by text on a mobile phone, or online. The online and mobile accounts are through the Bristol Credit Union, which is a partner in the project. The Bristol City Council has been supportive and is offe
ring to pay any staff members who are interested a proportion of their wages in BPs. The council will also accept BPs from businesses to pay their taxes.
The cost of paying by mobile phone is 2 percent and 1 percent online, which is paid for by the receiver, usually the merchant. Bristol Pounds can be given in change, traded within the network of businesses and suppliers, paid to the council for business rates, or redeemed for sterling pounds with a fee of 3 percent. Several hundred merchants have signed up so far with the launch of the currency slated for the fall of 2012.
TECHNOLOGY
Technology has been used for some pretty mindless applications: gossipy and vacuous blogs with no real substance and silly games. For example, the world has spent a total of 200,000 years playing the game Angry Birds.25
Despite this trend, emergent technology solutions now provide banking services beyond the traditional brick-and-mortar offerings. Soon, there will be full-spectrum solutions that make the remittances, payments, and exchanges of value in a multicurrency environment safe, legitimate, and affordable, where both competitive and cooperative transactions take place seamlessly from an individual’s e-wallet. Well underway, though, is a new wave of remedies in which Internet and mobile technologies provide innovative options for accessing financial services, thus leapfrogging over the predominant modes of expensive banking modalities.
At present, there are technology silos that hamper the fluid and seamless movement of money within the marketplace. Mark Fischer, founder of Inspire Commerce and a recognized e-commerce expert, comments, “In closed networks, users are captured in a specific channel. This is a proven business model, yet it is increasingly out of touch with the expectations of digital-era consumers who have come to expect choice and ease of use from online and mobile payment services. Closed solutions are beginning to lose favor, and will either consolidate into a universal platform or be left behind.”26
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