The Need for Community Based Credit Systems
by Robert Swann, April 29, 1986
MIT Conference on Appropriate Technology
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MIT Conference on Appropriate Technology
A major factor affecting the expansion of appropriate technology
production is the lack of available credit at the local
level to finance such enterprises. There are a number of
reasons for this situation, some of which are unique to
third world countries but some of which apply to industrialized
countries as well.
For example, one major factor is the simple fact that from
a banking point of view, it is much more profitable to make
large loans than small ones. For this reason capital tends
to accumulate in large urban banks, where it can be lent
out in large amounts to international corporations or nation
states. Rural banks send the savings of small landholders
and small businesses into centralized urban banks, rather
than making small, local loans to enterprises that use technologies
appropriate to a regional scale-no matter how viable these
small enterprises may be. In Bangladesh, for example, less
than 10 percent of total bank deposits are lent in rural
areas, even though the rural population is over 90 percent
of the total population.
Other factors that mitigate against financing small-scale
appropriate technology enterprises include: high rates of
interest in rural areas dominated by local money lenders
(who are often the large landowners); and the lack of a
healthy local market, which in part is due to the low-wage
scale of landless laborers.
But rather than dwell on the many reasons for this situation,
I want to illustrate, by example, solutions to this problem.
There are in fact many hopeful indications arising around
the world demonstrating that new approaches are already
making changes.
An example of an appropriate Technology approach to local
banking is the Grameen Bank in Bangladesh. In this country,
which would seem to be the most intractable of any developing
country, this highly successful approach to making loans
to very poor landless people has a 99 percent repayment
record, and over one hundred thousand people are affected
by it. From what I understand, there seems to be several
reasons why this bank has been successful:
Only productive loans for specific purposes are
made: As an example, a woman borrows to buy a cow, from
which she will draw milk for sale. This principle could
be called the self-financing principle whereby the purchase
of the machine or animal (the technology) for which the
loan is made has the potential for repaying the loan out
of the earnings, or increased earnings anticipated. This
principle illustrates the important linkage between technology
and financing.
Its group approach: Groups of five people are formed.
Loans are made to two of them, and notice given to the other
three that only after the first two have demonstrated their
ability in repayment can the other three receive loans.
This brings peer pressure to bear and brings the decision
to make the loan into the public arena.
But the situation of the Grameen bank, as with all such
small loan programs, is that it primarily depends upon a
very limited amount of local savings. Alternately, it may
depend upon any national or international financing that's
attached to it.
I want to illustrate by example, another program with which
I am closely associated as one of the founders.
This is the SHARE program. SHARE stands for Self-Help Association
for a Regional Economy, and is located in Great Barrington,
Massachusetts. This program is simply a loan collateralization
program in which SHARE members use their deposits in a local
bank to guarantee loans to small enterprises and farmers.
Like the Grameen bank, this program uses for its primary
criteria that the loan must be for a productive purpose,
in the sense that the investment will, by its nature, bring
in a return capable of paying off the loan. Also, similar
to the Grameen bank, our loans are very small in U.S. terms-$3,000
is the maximum size of the loan. So far we have guaranteed
ten loans that have helped start ten small businesses and
increased employment by about thirty-five people. An example
is a goat cheese production business that currently employs
four people.
In my opinion, the two most innovative aspects of the SHARE
concept are the social criteria it has developed, and the
way it has been linked into the existing banking structure.
The social criteria require two things. One, the loan's
purpose is to help improve the local economy, by increasing
local employment and strengthening local self-reliance.
Two, the structure of the business receiving the loan must
in some way permit or encourage distribution of profit or
ownership to the workers in the business. This requirement
of distribution of profit and ownership is perhaps the most
unique aspect of the SHARE criterion. If it were practiced
on a broad scale by the banking system, it could lead to
a more equitable distribution of income without the need
for government transfer payments or the welfare system.
The SHARE is linked into the existing bank system in a very
simple way. SHARE members simply make a deposit in a joint
account with SHARE at our local cooperating bank. These
deposits, held in passbooks by SHARE, are used as collateral
with the bank making the loans. The SHARE board, not the
bank, designates the loans. In this way, the loan is guaranteed,
and therefore the bank charges only a service fee of 4 percent
on the loan. The interest cost to borrowers is the 6 percent
interest paid to depositors on their passbooks, plus the
4 percent service, or only 10 percent interest rather than
the 18-20 percent interest normally charged the small borrower.
Two obvious advantages emerge from this arrangement. From
the borrowers' standpoint, a lower interest rate is available.
From SHARE's point of view, the administration of the loans
and the record keeping of depositor accounts remains in
the hands of the bank, which has systems better equipped
for this function. Yet decisions about which businesses
should be extended low-interest credit remains with the
community, represented by SHARE.
These basic elements of the SHARE program can be adopted
almost anywhere in the world, and in fact have been duplicated
in at least parts of the U.S. such as Eugene, Oregon; Pittsburgh,
Pennsylvania; Cascadia, Washington; and in the Ozarks. Almost
weekly we receive requests about how to start such a program.
There is obviously a great need for it, and we are feeling
almost at a disadvantage because the modesty of the program
is disproportionate to the need.
But from the standpoint of those of us who initiated the
SHARE program, all of this is but a prelude, a setting the
stage for the next step, which we have been planning for
over a year. This step could have far reaching consequences
if we can demonstrate what we hope to demonstrate. Namely,
communities can and should issue their own local currency.
There are many reasons why this can and should be done.
The major curse of nationally issued money is its instability
in terms of the inflation or deflation that result.
As Jane Jacobs has illustrated in her recent book, Cities
and the Wealth of Nations, the effects of a nationally
calculated adjustment of money supply based on the inflation
and deflation of the national currency lead to a maldistribution
of money, wherein one region overdevelops and another under
produces. In general it leads to a concentration of wealth
in oversized city regions, and a lack of development in
outlying peripheral regions.
Locally issued currency, or community created credit, could
solve both of these problems and lead to a more equitable
distribution of capital and resources on a world level.
In laying the groundwork for this by starting the SHARE
program, we have prepared for this next step of issuing
local currency. By building up a good relationship with
a local bank, we have paved the way toward bank cooperation
with this next phase. Our proposal to the bank is that it
handles the exchange between dollars and "Berkshares," as
we have named our local currency. The bank has agreed to
this in principle, and we are currently working through
the contractual agreements for that arrangement. We have
received approval from the state banking commissioner and
support for the project from our state senator and representative.
The U.S. Treasury and the SEC have indicated that they have
no jurisdiction in this area and that it does not violate
any of their laws. So any possible barriers at the federal
level have been cleared.
We have put together a prestigious board of advisors, including
some former and present advisors to the White House. We
are presently completing final details with the bank, and
are preparing to start the program in the fall.
Local merchants are perhaps the key to the program, because
they must accept the currency in trade. We have been talking
with them and enlisting their support. From their point
of view, fall or winter would be the best time to start
issuing a local currency, because summer trade in the Berkshires
is brisk (it is a tourist area). It would help them to become
familiar with handling the new currency during a slow period.
Advantages and Potential Behind a Community Created Credit
System
What are the advantages and potential behind a community-created
credit system and what is its link to appropriate technology?
The community can create as much credit as is needed for
productive or self-financing projects. Since technology
is always closely related to "payback" periods, without
depending on savings the community can finance technology
because it has a reasonable payback period of two to three
years. Many new technologies have even faster payback periods
than two or three years. Moreover, even longer pay back
periods can be considered without the danger of devaluing
the currency, as long as they are balanced with shorter
periods. Thus, dependency on national currency is reduced,
and at the same time, a local stable currency is created.
Since credit is created without the need for savings or
the need to pay interest to savers, interest rates to borrowers
can be further reduced to cover only the cost of printing
and administration-perhaps 3-5 percent. Such low interest
rates should be a tremendous stimulus to small enterprises,
since high interest on loans is often the major deterrent
to developing a new productive enterprise.
Looking at the problem from the standpoint of third world
countries, which are presently dependent on sources of finance
at the national level from either the IMF or the World Bank,
local programs could reduce this dependency and might gradually
release the international banking agencies' control of the
national government. I am aware, of course, that most of
the IMF and World Bank financing is for large-scale projects,
many of which bring limited benefits to poor people. However
present IMF and World Bank austerity programs are putting
great pressure on third world governments. For this very
reason, these governments, which might otherwise resist
decentralized sources of credit, may welcome them now as
a means for relieving the pressures they are under.
Backing Local Currency with Local Energy
There is another important aspect to this proposal that
I have not yet discussed, which is the use of locally produced
energy as the backing for locally created currency and credit.
Part of the reason why our present monetary systems have
remained viable in spite of the vast overissue of credit
and money to pay for an ever proliferating military and
national welfare system, and their accompanying bureaucracies,
is that cheap energy, namely oil, along with ever more efficient
technology has kept the systems viable. OPEC changed all
this in 1973 when it suddenly quadrupled the price of oil
through the oil cartel. This brought about an "energy crisis,"
which while potentially real, was in large part artificial.
As the world shifted to more energy efficient methods,
and to greater dependency on other energy sources, both
renewable and nonrenewable, the artificial aspect of the
crisis has been relieved, and we are now in a period of
stabilization of energy prices at lower levels. But the
reality of a growing energy crisis remains and may be accelerated
as people return to increased use of oil, and as the world
supply of oil is reduced at a more rapid rate. In the meantime,
since the price of energy and industrial production are
closely related, the value of the dollar has stabilized
for the moment and inflation seems to have subsided. But
I submit that this situation may change very rapidly. There
are many forces at work including third world countries'
indebtedness that could result in a very unstable world.
In the U.S. for instance, the impact of the farm crisis
is yet to be felt.
All of this leads toward the concept of backing local currency
with locally produced renewable energy sources. One of the
most interesting things about renewable energy sources is
their diversity and availability on a wide basis. Sources
include sun, hydro, ocean waves, wood, wind, etc. These
resources are available almost anywhere in the world. These
resources are increasingly becoming competitive with oil,
coal, and nuclear power as appropriate technology develops
simpler and lower cost techniques for utilizing them. Virtually
every community or region in the world has some source of
renewable energy. By backing its own locally created currency
with such energy sources, the community not only encourages
local energy production, but works toward a long-range permanent
basis of renewable energy production. This should lead toward
what E. F. Schumacher and Kumarrappa, the Indian economist,
called an "economy of permanence."
In our own case, we are backing Berkshares with locally
produced cordwood. By backing, I mean that the Berkshares
will be redeemable in cords of wood available, on demand,
in the same way that gold was available on demand in the
past-so long as the holders of the currency want to redeem
them. Since a unit of cordwood will always be redeemable
for one cord of wood, and since one cord of wood will always
be equal to so many BTUs of energy, we anticipate the Berkshares
will not fluctuate in real purchasing value. Other communities
with different sources of renewable energy can utilize these
sources for backing.
Eventually I imagine that converting local energy sources
into electricity could create a common worldwide denomination
for exchange in terms of kilowatt-hours. In other words,
all local currencies could be redeemed, if desired, by using
them to pay for electricity. Our present PURPA laws encourage
local, small-scale energy production that can be sold to
utility companies, and money or credit that's issued on
the basis of the credit created with the companies.
For some sixty to one hundred years, the U.S. and most other
countries have been saddled with a centralized banking system
that grew out of the need for large amounts of capital to
satisfy large-scale industrial development. Now high tech
microcomputers are making small-scale production very competitive
with large-scale production. But our present banking and
monetary systems are not adapted to the needs of this increasing
potential for decentralized production systems. What is
needed then is a return to the pattern of local banking
structures that prevailed in the U.S. in the early part
of the nineteenth century, which made the rapid development
of the West possible. John Kenneth Galbraith describes this
pattern of banking in his book, Money. He makes
it clear that without it, for all its excesses, the U.S.
would not have been as rapidly and broadly developed.
We need to go back to such appropriate institutions for
creating local credit, but we need to develop them in such
a way as to avoid the defects of the earlier banking systems.
The first step, I believe, is to create a new ethic
for banking. By an ethic, I mean that we need to create
both the social and ecological criteria, as well as the
financial criteria, for making loans to businesses, industries,
etc. What must be made increasingly a part of public consciousness
is that banking, or the determination of where credit goes,
is not simply a private matter based on the financial concerns
of for-profit banks. Both the creation of credit and loans
made from savings of the community are, in fact, a matter
of great public concern. In the future banks must be held
accountable for social criteria in making loans
as well as financial considerations.
For more information, please contact the
E. F. Schumacher Society:
140 Jug End Road | Great Barrington, MA 01230 USA
Phone: 01.413.528.1737
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