1 Local Money System: Financial Inclusion and Reduction of Poverty Prof. Dr. Marco Crocco Dr.Fabiana Santos Laboratory of Studies on Money and Territory

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Local Money System:Financial Inclusion and Reduction of

Poverty

Prof. Dr. Marco CroccoDr.Fabiana Santos

Laboratory of Studies on Money and Territory – LEMTe

Center for Regional Development and Planning – Brazil

IMTFI's First Annual ConferenceIrvine, November, 4-6, 2009

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Aim of the Research ProjectAim of the Research Project

• The primary aim of this project is to investigate the potential of “Local Money Systems” (LMS) as an innovative instrument to reduce poverty;

• A LMS can be defined as an agreement among persons belonging to a (geographically delimited) community directed to the creation of a local currency that will coexist with the national currency and will be used as means of payment in that community only.

• Object of investigation: one Brazilian Community Development Bank – Banco Bem (Bem [Good] Bank)

• In 2005: First exploratory research;

• 2009: What is intended now is to return to that locality and to analyze that experience after 3 (three) years of the previous research and 4 (four) years after the beginning of that experience.

Development and Methodology of the Research

Development of Brazilian’s experience of Community Development Banks; Analysis of secondary data (almost done)

Socio-economic characterization of the area of Bem Bank’s activities;

Analysis of official secondary data; Analysis of a socio-economic survey made by

the community it self. (half way)

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Structured Interview with the managers of the Bem Bank;

Two interviews was made by two different researchers at a different time (done);

Analysis of the two interviews makes possible to built a picture of the governance of the experience (half way) .

Application of a pilot questionnaire in the community attended by the bank; (done)

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Application of a questioner in the community (under way) Analysis quantitative of the results of

the survey (to be done)

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Financial Exclusion in Brazil

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Data for Metropolitan Areas (2004): 41% of the people interviewed has a

bank account; 67% of those that do not have a bank

account show desire in have one; People that lives in legalized houses

have higher degree of access to bank account (36%), comparing with people that live in the poor communities (27%)

46% had some kind of informal credit

Financial Exclusion in Brazil Only 15% has made an application for

credit in the last 12 month; 2/3 of those were accepted;

83% of the supply of loans were directed for personal proposes, being 44% for family emergencies;

25% of the sample had debit card, and 20% had credit card.

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Financial Exclusion in Brazil:Number of bank branches / municipalities

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Financial Exclusion in Brazil:Percentage of municipalities without bank branches

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Financial Exclusion in Brazil:Percentage of Population living in municipalities without bank branches

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Official Policy Towards Community Development Banks

Formal Secretary for Solidarity Economy inside the Ministry of Work and Employment It’s objective is to stimulate the

development of solidarity economy throughout the country;

The development of solidarity finance is one of the role played by the Secretary;

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Aims of the Solidarity Finance Program: To facilitate and increase the access

of micro firms to credit; To facilitate and increase the access

to financial services of the poor population in a way to guarantee a higher degree of citizenship;

To reduce interest rate. 12

Official Definition of Community Development Banks

They are financial services with the following features: Solidarity; work in networks;

associative and community nature; Directed to the reorganization of the

local economy, with the aim of generate work and income, having the principles of the solidarity economy as a base.

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Official Aim: 183 banks until 2010; Total value to be invested in

Community Development Banks: R$ 16.000.000,00 (around US $

10.000.000,00)

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Official Position of Central Bank Community Development Bank must have an

authorization by the Central Bank and fulfill the following conditions:

1. The social money must circulate in a region with less than 50.000 inhabitants;

2. The social money must have an anchor in official currency.

3. It must be freely convertible in a preset, fixed, exchange rate to the official currency (one to one);

4. The social money can’t be used to pay taxes;5. Community Development Banks can’t accept deposits.

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Community served by the Bem Bank

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Socio-Economic Features

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0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0 40,0 45,0 50,0

Without Education

Elementary / Secondary - Incomplete

Elementary / Secondary - Complete

High School - Incomplete

High School - Complete

College - Incomplete

College - Complete

(%)

Leve

l of e

duca

tion

Level of Education of the Respondents (%)


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0 10 20 30 40 50

Less than 1

1 a 2

2 a 3

3 a 4

More than 4

Don´t know

(%)

Min

imu

Wag

es

Total Income of the Respondents' Family


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0,0 10,0 20,0 30,0 40,0 50,0 60,0 70,0 80,0 90,0

Food

Electricity

Gas

Health

Telephone

Clothing

House rental

Water

Education

Transportation

Leisure

Others

Don´t know

Most important itens in the Family Budget (%)

The Process of Bank Creation

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Bem Art and Fashion (2002)

Bem Art Wood(aug. 2003)

Bem Nourish(Nov. 2003)Lend

Money Lend Money

Atelier of Ideas (2003)(NGO)

Bem Cleaning (Jan 2004)

The Process of Bank Creation

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Atelier of Ideas

Bem Bank CoopBem

Bem Art and Fashion

Bem Art Wood Bem Nourish Bem Decoration Bem Buider

Bem Cleaning

The Bem Bank

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The Social Money

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Features of Social Money System

The circulation of the Social Money is limited to a pre-determined area

main aim: to strengthen the local economy and increase the level of income (operation of the income multiplier);

Social Money is freely convertible into the official Money (R$1= $1 Social Money)

main aim: sustain the trust in and reputation of the social money; allow exchange and other types of relations with “external markets”;

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in order to increase its circulation in the area, the local businesses are stimulated to offer discounts when the social money is used (2%);

in order to be allowed to trade using social money, the owner of the business must be registered in the Bem Bank and must display in the shop an ad saying that the business accept the social money;

in order to receive productive credit from the Bem Bank, any producer or business owner must accept the social money in its business;

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Features of Social Money System(R$100 = US$57; R$5,000 = US$2,850)

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Types of Credit

Maimum Value

Interest Rate*

Prerequisite

Consumption 100(only in social

money)

0 3 phone numbers of someone to give a reference;

One of these persons must be a customer of the bank.

Productive 5,000.00(officiall and

social money)

0.5% (first credit)

1.0% (after on)

Indicated by 3 persons of the community;

Analist of credit from the bank visit and collected informations about the applicant;

A board gives the final decision.

House Reform

5,000.00(offical and

social money)

1.0% Indicated by 3 persons of the community;

Analist of credit from the bank visit and collected informations about the applicant;

A board gives the final decision;

Usually the customer of this type of credit has a permanent income.

* Plus 1% of administration fee


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Type of Credit Number

Productive 119

House Refom 204

Total 323

Applicatitons not approved 44

Applications Wainting Type of Credit Number Value

Consumption 235 15,331.00

Productive 160 227,172,48

House Reform 103 229,146,80

Emergency 3 1,108.66

Total 501 472,758.94

Distribution of Credit

These 501 operations were distributed among around 250 personsTotal population in the community: 31.000


Informal way to deal with default: Based on trust; How much you can pay?

Formal agreement with an official bank (Caixa Econômica Federal):

People from the community can receive their social benefits in social money;

People from the community can pay their taxes and government bills (water, electricity) in social money at the official bank post at the Bem Bank; Slide 43

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Preliminary Findings

Essential features that come from the interviews: Slow progress: In 5 years of existence the

bank manage to attend only 0,8% of the community:

Poor management: No registry of customers; No systemic records of the loans; Dependent on the memory of the people that works

on the bank; Lack of capabilities.

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Capture of the experience by the group that runs the project;

High proportion of the borrowers has personal relationship with the people that runs the project;

Difficulties in expanding trustful relationships

Leak of reserves House and productive credit;

In what extend these two types of credit are contradictory with the main objective of the bank

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Points to think about: A bank with a stage of development that has to

share the same space with banks in a more development stage;

Official policies: how to expand experiences that has been developed in an specific context to an normative public policy?;

What are the possibility of these experience to be used as a complementary instrument to fight poverty in a scale of a country like Brazil ?

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Others videos can be seen at:

http://www.youtube.com/watch?v=c8m_YLu37U4 http://www.youtube.com/watch?v=Y4JVJJvhWR8 http://www.youtube.com/watch?v=aGy_H_zsalU http://video.globo.com/Videos/Player/Noticias/0,,GIM1038225-7823-

ATELIE+DE+IDEIAS+ATUA+EM+OITO+COMUNIDADES+DE+VITORIA,00.html

http://video.globo.com/Videos/Player/Noticias/0,,GIM1038226-7823-ENTREVISTA+PRESIDENTE+DA+ASSOCIACAO+ATELIE+DE+IDEIAS,00.html

http://video.globo.com/Videos/Player/Noticias/0,,GIM1038227-7823-ONG+REALIZA+O+MAIOR+SONHO+O+BANCO+COMUNITARIO,00.html

http://video.globo.com/Videos/Player/Noticias/0,,GIM1038228-7823-OS+PROJETOS+DE+CONSTRUCAO+DE+MORADIAS,00.html

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Thank you

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Documents

1 Local Money System: Financial Inclusion and Reduction of Poverty Prof. Dr. Marco Crocco Dr.Fabiana Santos Laboratory of Studies on Money and Territory