When the poor districts create their own currency

March 9th, 2010 § 0

This post is also available in: French, Spanish, Portuguese (Brazil)

From the Morro São Benedito, city of Vitoria, Espirito Santo State, Brazil. February 2010.

(read the article in French, Spanish, Portuguese)

We have already mentioned the community banks with Fundefir, Venezuelan Foundation (see article on Socialter, or Rue 89). The community banks are those banks developed in poor neighborhoods by the residents themselves and which are designed to make micro loans for local residents.

The definition of a Community banks in Video (French Version)

http://www.dailymotion.com/videoxchzzp

The community banks movement is very dynamic in Brazil. Original point: they use their own currency. There are more than 50 alternative currencies, or “moedas sociais” in Brazil. These notes are created by community banks so that money lent is only spent within the neighborhood. Thus the loan may be considered as a good investment in the poor neighborhood.

There are 50 and some alternative currencies in Brazil, which are at par with the real (Brazilian currency) and account for about one million and a half (or 600,000 euros), which makes 30,000 reais per bank (or 12,000 euros).

In video, the definition of an alternative currency

http://www.dailymotion.com/videoxci08i

A community bank starts as follows: someone makes a donation (in reais), that is converted to at par in alternative currency, then transformed into a loan without interest. Alternative bank notes are numbered and have a security system. The hard part comes next: the bank must convince the borrower, and especially the shopkeepers, of the utility and the validity of the new currency. It must be explained to the merchant that alternative currency will bring him customers (since it is only accepted in shops in the neighborhood). To convince the borrowers, prices are negotiated with the merchants.

Ultimately, the goal of a community bank is to be self-financing. How ? By making loans with interests to microentrepreneurs (the consumer loan is interest free). But the interests are usually very low and do not allow to reach the break even point.

The Origin

The origin of community banks in Brazil is the Banco Palmas, founded by Joao Joaquim Melo Segundo in Fortaleza, North East Brazil. The « Banco Palmas » was a success. Until the following observation came up: people prosper, but spend all their money outside the district. There is a lot of money gets into and out of the district, but it remains poor. The neighborhood is poor, not because there is no money, or no wealth created, but because the wealth comes out. And so was created the « Palmas », the first alternative currency in Brazil.

Recognition

The Central Bank of Brazil did not appreciate the appearance of this rival currency. It took a long battle and eventually the community banks prevailed: the currency is now considered as a “complementary currency”. It can circulate legally provided that it can be convertible and at par with the real (1 unit currency = 1 real alternative). This is to avoid any systemic risk to the multiplication of currencies. On November 18, 2009, the Central Bank of Brazil has recognized the legality and utility of the network of community banks. These provide banking services to people who are generally excluded from financial system and help local development. On January 4, 2010, an agreement was reached between the community banks, the Central Bank and the Ministry of Employment, which aims to provide accompaniment.

And elsewhere …

Brazil has no monopoly on community banks. Argentina is the country where we find the more, because of the currency crisis that hit the country earlier this century. But iff these banks have managed to acquire a legal façade, it does not mean the fight is over. There is much work to be done in order to convince people, particularly retailers, of the usefulness of the alternative currency and their interest to adopt is. More than its coverage rate or its convertibility, what makes the viability of a currency is the trust people put in it.

Find our article on Banco Bem, an example of community bank in Brazil

Carta da Rede de Bancos Comunitários

A detailed article (in Portuguese) on community banks in Brazil

An article (in French) from Alternative Economic on Social currency

Socialter article on Community banks in Venezuela

Socialter article, on Rue89

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