The Community is the Currency

New research shows that lending to Scottish SME’s in the past four years has fallen dramatically by some £1.8 billion. SME lending in five local authority areas – North Ayrshire, Falkirk, East Renfrewshire, West Lothian and Na h-Eileanan Siar – collapsed by over 25 per cent as Scottish businesses become increasingly starved of the credit they need to finance working capital.

As banks centralise still further, and allocate capital more ‘efficiently’ they have cut costs by closing local branches, and reduced risk by focusing on secured loans.

New instruments and financial technologies are clearly needed: one possible instrument is the Credit Union, where people make deposits which fund loans within a community with a ‘common bond’, which may be geographic, functional (eg the Metropolitan Police) or possibly both. A new generation of mutually owned banks are being proposed, but the problem here is that as wealth has become more concentrated there are insufficient retail deposits to fund credit unions and banks.

Another possibility is invoice financing or factoring where there are dozens of competing service providers, but none of them is cheap. Then there are complementary currencies of which the best known is probably the emerging range of Transition currencies such as: the Totnes Pound; Lewes Pound; Bristol Pound; Brixton Pound and so on.

While local credit unions, banks and complementary currencies tend to keep economic value local, which is unequivocally a good thing, what they essentially do is move existing economic value around; they don’t actually do a great deal to stimulate new economic activity, the need for which is growing daily more urgent.

Finally, and most promising because they actually work in the here and now, on a limited basis are business to business barter credit systems such as the Swiss WIR system, Sardinia’s lively Sardex system and numerous proprietary systems like Bartercard. These systems illustrate that wherever barter is combined with credit, or time to pay, the result is a monetary system, but all of them are based on a centralised operator and issuer of a complementary currency such as a “Trade Pound”.

Maybe there’s another way of doing it?

Guarantee Societies

Mutual assurance of risk by Guarantee Societies is not a new concept. For over 150 years ship owners have clubbed together in a range of ‘Protection and Indemnity’ (P & I) Clubs which mutually assure shipping risk which commercial insurers will not cover. For 135 years the same service provider, Thomas Miller, has served P & I Clubs by: managing risks, handling the pool of resources backing these risks; handling claims and providing other services to P & I Club members.

Since 1992 some 18 European countries have seen the formation of Guarantee Societies which enable members of an association, typically businesses, to join together to mutually guarantee bank loans by their members.

Anyone familiar with the work in the field of micro-credit of Dr Muhammad Yunus with Grameen Bank in Bangladesh will know that one of the key success factors was the way in which micro-loans are supported by the guarantees and support of small circles of friends and relatives. The advent of pervasive direct instant connectivity and paperless accounting and administration now enables the concept of the Guarantee Society to mobilise a new approach to mutually assured community credit.

Linlithgow Community Credit

Linlithgow is the green and pleasant garden burgh where I live in a population of about 15,000 people. What might Linlithgow community credit look like? Well, younger generations may simply use a mutual credit app on their mobile phone, there will also be a community credit card. While these will look and feel just like any other credit app or card, ‘under the bonnet’ it will operate very differently.

Local businesses frequently club together in chambers of commerce and otherwise, for their part Linlithgow’s businesses took up the Scottish Government’s Business Improvement District (BID) initiative, and to launch two BID schemes which have now merged into the One Linlithgow BID. But whatever the Linlithgow trade association, businesses may become merchant or enterprise members of a Linlithgow Guarantee Society (LGS). Merchants & enterprise members may then extend interest-free credit (time to pay) not only to each other (B2B) but also (B2C) to the local individual LGS customer members.

While mutual credit is interest-free, it is not cost-free. A subscription may cover agreed costs of the necessary shared accounting system, of which there are several cheaply available, and of the service provider. This could be perhaps a credit union or possibly people with banking experience intersted in working in a shared local finance hub.

The role of the service provider is to set and manage ‘guarantee limits’ on credit extended by merchants & enterprises, and the credit extended to individuals, and also handle problems and defaults. In other words, the service provider will do precisely what it does now but the difference is that it would no longer be exposed to the risk of defaults. But if a bank doesn’t take the credit risk, then who does?

It is the Guarantee Society members collectively who are assume and mutually assure the risk, and they protect themselves simply by levying a ‘guarantee charge’ to both businesses and individuals in respect of the use of the guarantee. In other words, both businesses and customers would pay into a ‘Default Pool’ held in common by a custodian for the members, rather than by a bank as proprietary owner.

Wherever the default pool of funds is held, a service provider ‘managing partner’, in addition to covering agreed costs, could be incentivised with an agreed bonus based upon service level and default experience.

The Co-operative Advantage

Anyone familiar with credit cards will know that they make a fat transaction charge to merchants, and charge substantial interest and other charges on unpaid customer balances. A mutual community credit app or card will essentially brings together a cooperative of merchants sharing credit risk and operating costs with a co-operative of business and retail buyers on credit terms.

The outcome is that such a Linlithgow Community Credit Card may out-compete conventional cards simply because it has the Co-operative Advantage of not paying returns to rentier shareholders and payments to management which are not reflected by performance.

Local Procurement

An additional bonus from this mutual risk-sharing approach, is that it enables mutual assurance of the performance risk and administration faced by the public sector face in contracting with SMEs and which led to the growth of massive contractors such as Carillion.

It opens up the possibility that SMEs may club together locally or in trade associations and work with contract management and development service providers to take on major public contracts without being exploited by unnecessary middlemen.

The Community is the Currency

Beyond conventional SMEs, there are additional possibilities for mobilising local communities through extension of mutual credit for valuable local activities such as care for local people or environment, and for cultural activities, growing local food, health and well-being, where the true value of the service provided is not recognised. So the growing number of people who are unemployed, or precariously underemployed in the growing ‘gig economy’ could be extended credit by fellow Guarantee Society members and in return could provide care for each other, and for the place in which they live or provide creative and cultural value such as music, art, drama., sports and so on.

As with conventional credit cards, there are no deposits necessary in such a system, which could be introduced tomorrow using conventional software. The result is £ denominated credits issued in Linlithgow which spend just like conventional pounds, but do not require, as do Transition Pounds, the pound for pound backing of conventional sterling manufactured by the banking system.

So community credit may be created which circulates within the geographic area of local Guarantee Societies, and may be integrated with credits based on the use of local land and local use of local renewable energy production.

But such asset-based credit is another story: the reality is the Community is the Currency.