Microfinance without the finance : The possibility of scrip-based development funding
By Prof. Jonathan Warner | Quest University Canada
Microfinance is a wonderful idea. Making small loans to poor people who would not otherwise have access to funds, but who have the ability to use the money to build and fund businesses has proven to be a path to bring many millions of people worldwide out of poverty. But if it’s such a good idea, why does it generally take an outside body for a scheme to commence? Is it possible for a community to create financial resources itself, and so obviate the need for any external funding?
Locally-issued community currencies have a long history. Examples are the various Notgeld issued in Germany and Austria after the end of the First World War, and the variety of substitutes for money that appeared in the United States during the Great Depression.
Today, a number of communities have experimented with the issue of local currencies. The stated reason for most of these is to stimulate local businesses, and to keep money within the community. For example, in British Columbia, Salt Spring Island issues its own notes in denominations from $1 to $100, as well as a $50 silver coin.
The current economic crisis has increased interest in the idea of local currencies, with several schemes starting over the last year. The Transitions Towns movement in Britain includes Lewes, East Sussex, which issued currency in September 2008.
Community currencies are generally at par with and easily convertible into the legal tender of the country in which the community is located. To ensure that people have faith in the currency, and to solve any problems of “congestion” (too much of the scrip piling up with certain merchants), some mechanism generally exists to convert it into legal tender. Salt Spring Island currency is convertible back into Canadian dollars at par on demand. The issuing community therefore needs to keep a reserve of money with which to redeem the scrip.
The easiest way to do this is to sell the scrip in exchange for legal tender, but in that case there is no new money or credit in the community, except for the small amount of seigniorage that could be earned by placing the money obtained from scrip sales on deposit with a bank (or in some equally safe investment). If redemptions cannot be made until some future date, then the scrip can be sold at a discount, with the difference covered by the interest earned between the issue and redemption dates.i Alternatively, merchants might be prepared to pick up some of the bill, because of the increase in trade that the scrip generates. Thus each Christmas the Iowa town of Hawarden sells a form of scrip at a 15% discount – merchants presumably think this is worthwhile to capture sales that would otherwise be made in other nearby cities. Also, most issuers also find that nicely-designed notes or coins become collectors’ items, and are never submitted for repayment.
The examples mentioned so far are all from the developed world. Instead of assisting the poor, community currencies primarily function as a plaything of the middle classes. Can community currencies work in less developed parts of the world?
There have been some uses of alternative currencies in middle-income countries. In Venezuela, there are at least ten local alternative currencies circulating with Presidential approval.ii In north-eastern Thailand, the village of Santi Suk has used a local currency as a circulating medium of exchange for the past decade, introduced following the Asian financial crisis of 1998. The use of the currency ebbs and flows depending on the availability of bahts within the community, thereby acting as a stabilizer in times of monetary shortage.
The abbot of the local Buddhist monastery, Phra Supajarawat, acts as the banker for the scheme. Other communities have since copied Santi Suk’s idea.iii
But could the community credit feature implicit in scrip be used to finance new businesses in a way similar to the way in which microcredit does? One indicative example from the 1980’s is the Great Barrington Deli Dollar. Faced with the demolition of his delicatessen and sandwich shop to make way for a new road, Frank Tortoriello wanted to relocate to larger premises. He was unable to obtain a bank loan; but, advised by the Schumacher Society he issued a form of scrip, known as “Deli Dollars” as a way of financing the move. Each certificate was redeemable for $10 in sandwiches after the Deli had been moved, and was sold for $8 during the last weeks that the old Deli remained open. The community obviously valued the Deli, as Mr Tortoriello was able to raise all the money he needed, and the Deli was successfully relocated.
What makes this story particularly interesting is that the Deli Dollars, instead of just remaining in the hands of their purchasers, began to circulate around town.iv In fact, the scheme was so successful that a couple of neighbouring farmers were also able to issue their own scrip, piggybacking on the Schumacher Society’s ideas, but charging $9 for a $10 certificate. v
The community of Palmeiras, an impoverished part of Fortaleza, Ceara State, Brazil provides an example from the Global South. Here, the Bancos des Palmas, established by the community in 1998, uses a community currency called Palmas, valued at par with the Real. But as well as facilitating transactions between people within the community, the Bancos des Palmas also makes loans, which can be used for business development.vi
Could this model be extended to work in low-income countries? For an issue of scrip to be effective, it must be seen as trustworthy. As the community that agrees to use the scrip is in effect providing a form of credit, members of the community must have good reasons to believe that the credit extended will be paid off. The simplest way to do this is a currency board approach: the issuer will redeem scrip with legal tender on demand. If the issuer is trusted, either because of his track record (as in the case of Mr Tortoriello) or because of his reputation within the community, as with Abbot Phra Supajarawat and the organizers of Bancos des Palmas, then automatic redemption might not be necessary. For example, if the scrip had to circulate for a time before it was eligible for redemption, it would be possible to invest the legal tender funds that backed it, and so earn a return that could be ploughed back into the scrip scheme.
A sufficient number of community members must be committed to accepting the scrip in their transactions for it to be able to work. Just as the original Grameen model fostered accountability through group-lending, a scrip version of micro lending must have some means to do the same. Jeff Powell and Menno Salverda, the development volunteers who suggested scrip to Santi Suk, suggest that access to scrip be through membership in an organization (rather like a Chamber of Commerce, but drawn more broadly), thus providing an element of collective responsibility.vii Members would be able to borrow interest-free, but their accounts with the scrip bank are public: any member can see both the total amount of scrip in circulation, and the amount of each member’s credit and debit with the issuer (the bank). viii
Not all business ventures that currently attract microloans will be amenable to scrip-based financing. Any business that requires that most of inputs come from outside the community will need legal tender loans in order to be able to purchase those inputs. This might be an advantage for a scrip-based system: research in Liberia suggests that much current micro-lending ends up being used for arbitrage trading: buying goods in bulk or where they are cheap, and then selling them on the streets, or in another community at a profit. While these services have value, they tend to suck foreign goods (imports) into the country, and to allow value to flow towards the capital or major port cities. While this is not necessarily bad, it will fail to contribute to poverty alleviation or development if the result is simply more traders with miniscule margins. In addition, legal tender microfinance loans might be differentially used for trade, because of the stringent terms for payback that rapidly require a positive cash flow from the business. ix
The best candidate for scrip-based lending would be a business that is labour-intensive and reliant on local inputs. For example:
A poor village in a relatively-isolated area needs to rebuild after a tropical storm has destroyed the school/irrigation system. There are unemployed men in the village, with the ability to carry out the work, but no means to pay them. An obvious solution would be for the country’s government to pay the unemployed workers to undertake the rebuilding. In the absence of finance from the government (perhaps because of budgetary constraints imposed externally or internally), could the village undertake the project itself? A scrip issue to create money to circulate within the village, initially paid to the builders to rebuild, would seem to be capable of doing the trick. Workers paid with scrip would spend it in the village: if there is little leakage to the rest of the country (i.e. most products consumed are local), the addition of the scrip money could regenerate the economy as it circulates.
A second example:
A villager, or NGO, has a business idea to add value to the local coconut crop by processing the various parts of the meat and pod. x In consultation with the people of the village, the chief (or Panchayat or village priest) agrees to administer the scheme, and produces an issue of scrip which is lent to the villager. As long as the inputs for the business can be obtained within the village, and the chief will accept the scrip back for taxes (or the priest accept it for tithes), the other villagers can accept the scrip as money without any great risk. As the business develops, the scrip loan can be paid back, and perhaps re-lent. If the borrower absconds, or the business fails, the community bears the cost, which should encourage wise decision-making initially.
Based on the experience of Palmeira and of other community currencies, the necessary preconditions for success of scrip-based microfinance would appear to be these:
- A community that is willing to accept the scrip for transactions
- A trustworthy issuer of scrip
- The businesses borrowing the scrip require few external inputs
- The scrip issuer must himself provide a way for the scrip to be used
- An exit strategy to allow the scheme to be wound up (redemption date for the scrip)
Whether these conditions are jointly sufficient for success in the poorest countries of the world can probably be determined only by experimenting with a pilot project. Scrip is not a panacea, as the experience of the 1930’s demonstrates, but could potentially be a useful addition to the micro financing toolkit.
References :-
i. California is, in effect, doing that at present. Having run out of money, the State is issuing warrants (IOU’s) that will be repaid in October, with interest accrued at 3.75% per annum.
ii. “Tokens of utopia”. The Economist December 20, 2008 p. 58
iii. James Hookway “When It Comes to Cash, A Thai Village Says, ‘Baht, Humbug!’” Wall Street Journal January 7th, 2009 p. A1
iv. See Helen Jones “Deli-dollar offers route to Business Funding Independent February 17th, 1999;
v. Philip Crawford, “Homemade Money Means Another Day, Another Deli” International Herald Tribune October 12th, 1991.
vi. For a brief account see Jamais Cascio, Banking on the Community at http://www.worldchanging.com/archives/002188.html
vii. An Indian Panchayat (literally, “assembly of the Five” elders) might form an appropriate issuing authority. I am grateful to Prof. Arvind Ashta for this suggestion.
viii. See “Designing a Community Coupon Exchange System” at http://www.appropriate-economics.org/asia/thailand/tccoupon.html (accessed March 4th, 2009).
ix. John Gorlorwulu and Jonathan Warner The Nature and Consequences of Weak Financial Markets in Post-conflict Countries: Report on a Case Study of Liberia, paper presented at the Conference on Bottom-Up Approaches to Global Poverty, Baylor University, Waco, Texas October 23-25th, 2008
x. Perla Manapol, who has successfully implemented similar projects in the Philippines, suggests that coconut-based processing industries might work well in Liberia, where coconuts are currently used only as a source of food. See Ms. Manapol’s postings at http://coconutsgalore.blogspot.com/, and specifically http://coconutsgalore.blogspot.com/2008/04/aklan-model-to-be-replicated-in-liberia.html.
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About the author:
Jonathan Warner is Professor and Tutor in Economics at Quest University in British Columbia. Prior to moving to Canada, he taught at Dordt College in Northwest Iowa, U.S.A., where he became interested in the various kinds of scrip that appeared in the state during the Great Depression. His is also interested in issues in Development Economics, particularly the Capabilities Approach of Amartya Sen and Martha Nussbaum, and religious views of human flourishing. He holds a Ph.D. from the University of Wales, and a B.A. from Oxford University.
