Ethical bank by Gian Marco MELANDRI

Course:

Topic:

Empirical Banking

ETHICAL BANK: JAK, THE BANK WITHOUT INTERESTS

Prof. : Mosche Kim Students :

Matriculation number:

Martina Leone

01/821125

Gian Marco Melandri

01/822497

ETHICAL BANK: JAK, THE BANK WITHOUT INTERESTS

INTRODUCTION The origins of institutions capable of performing as the first financial intermediary functions similar to those performed by modern banks, date back to the ancient world, especially to the Greek and Roman civilization where vivacious monetary economics were practiced. Banking almost disappeared with the end of Roman civilization, and resumed during the Middle Ages, starting from the biggest cities of Italy and the northern Europe, where banking institutions were created to support and to profit from the development of trade, craft and industrial activities. But over time things have changed; the events of recent times that characterized the financial world have been a demonstration of how the banks have shifted their interests more on pure finance, aiming only to create profits, while cheating their initial mission: support the real economy. Subtracting the lifeblood of credit has created difficult situations for many industrial and commercial activities, mainly of small size and in nations with low levels of development. In contrast with the large banks, increasingly oriented to the profit motive, nowadays credit models are springing up, with social oriented aims, such as cooperatives banks, which have activated, in this period of severe financial crisis, lines of microcredit based on the principle theorized by Nobel peace prize Muhammad Yunus(1) and by the Swedish ethical bank JAK. This paper will be in regards to the role and purpose of the JAK bank.

( ) Refer to M. Yunus, Banker to the Poor: Micro-Lending and the Battle Against World Poverty, 1999

ETHICAL BANK Over the past few years, a rising emphasis has been placed on companies and financial institutions' Corporate Social Responsibility (CSR). A simple definition refers to CSR as how companies and financial institutions take into consideration the impact on society of their operational activities(2). Consequently, it requires a self-regulating mechanism whereby businesses would monitor and ensure their adherence to law, ethical standards, and international norms to produce an overall positive impact on society. Nowadays, greater attention to the CSR has been extended especially to financial institutions, in fact, recently, many banks have been created with the meaning of ethical bank. When we talk about an ethical bank, we refer to a particular type of bank that, while functioning as a normal bank, chooses to base its activities on values related to ethics and ethical finance. Ethical finance aims to introduce more attention not only regarding the risk and the return of investments, but also the reflection of investment on so-called real economy to change financial behavior in a more social way. The main difference between a traditional financial institution and an ethical bank is in their choice of investments. The ethical bank promotes the "ethical investment" or rather the use of the savings of its customers in support of funding of organizations and companies operating in the areas of sustainable development, environment, social services and culture. Consequently an ethical bank dismisses all investments linked, directly and indirectly, to unethical activities such as arms production, investments in companies that are highly polluting and that don’t fully respect human rights. The main goals of an ethical bank are to guarantee its customers full transparency on investments and the freedom to choose for themselves how to invest their money. Their policy is also to provide the most disadvantaged customers with small loans with minimal interest. The latter is so-called microcredit, a financial instrument through which loans of small amounts are granted to persons not creditworthy as they can’t offer sufficient guarantees to banks to obtain a loan, and therefore they can’t access the services of traditional banks.

( ) S. Sciarelli, Etica e responsabilità sociale nell’impresa, Giuffrè, 2007, p.42

One of the greatest paradoxes of modern finance is that those who most need financial assistance have no access to credit, which instead is given to those who already have money. So, according to the mechanism of traditional banks, the person who has money can earn more money but those who have little money will have less and less because of mandatory relatively huge interest payments to the banks. One of the first people to go against and challenge this mechanism was Muhammad Yunus, a professor of Economics at the University of Chittagong (Bangladesh), who founded the ethical Grameen Bank in 1977. He showed how once a poor person obtained a loan, they knew how to make good use of it, investing in income-generating activities and paying back the loan. The experience of Grameen Bank's microcredit has been very successful and it has spread rapidly in many other developing countries. Finally, it has revolutionized the way we think about finance and has led to the emergence of new examples in ethical banking, all with different characteristics but a common goal: the application of ethical principles in finance.

JAK BANK The National Association of JAK (JAK Riksförening) was founded in Sköwde, Sweden, in 1965 as a not-for-profit organization by the builder Åke Mobrandt. In 1980 there were about 400 members, but since 1983 there has been a true exponential growth in adhesions, reaching a total of about 36.000 members in 2009. Only in 1997 did JAK receive the permission to become a functioning bank in all intents and purposes from the Swedish government, their operation commenced from the 1st of May 1998 under the name of JAK Medlemsbank (Bank Cooperative JAK). The idea of the JAK bank was born from an opinion movement that began in Denmark during the Great Depression of the 1930’s(3). This movement has been active in Sweden since 1965, it aims to create a financial system free from the concept of interest and 3

( ) M. Anielski, An Assessment of Sweden’s No-Interest Bank, 2004, p.11

strives to allow the redistribution of wealth. JAK, currently, consists of 36.300(4) members, each of which have their objective focused to create an alternative model of not-speculative finance while servicing individuals and small businesses. It truly is a bank owned by its shareholders, each holding a single share and all having the same weighted vote in the election of the Board of Directors. JAK stands for Jord Arbete Kapital in Swedish which means, respectively, Earth, the natural resource, Work, the resource given by human labor and Capital; seen as the three key principles of the real economy. These principles are reflected in the JAK bank, whose mission is not to create profit but to lend money to their members in the most appropriate manner according to the idea of interest-free economics. JAK members consider the values of freedom, equality, plurality, collaboration, and ethical choices as their core values. They also believe that money should be regarded simply as a means of exchange, with no interest, since the interest is one of the main causes of an unstable economy. In particular, the JAK Bank refers to the theories of the German economist Margrit Kennedy, who in her work “Interest and Inflation Free Money” says: << …Thus the second common misconception is that we pay interest only when we borrow money, and, if we want to avoid paying interest, all we need to do is avoid borrowing money…this is not true because interest is included in every price we pay.>> With these words Margrit Kennedy means to explain that, generally, those that produce consumer goods pay interest to the banks and then pass them onto consumer prices, these goods are what people buy for living (consumer goods). On average a regular consumer will pay approximately 45% interest when purchasing a consumer good. According to her research, this 45% of what we spend for living is hidden interest we pay to the banks. According to Margrit Kennedy the creation of a new monetary system not based on interest would lead to many advantages. These advantages would include easier access to credit for families and firms, the lowering of prices by 30-50% and the increase of social equity(5).

( ) Source: Jak Bank website 5 ( )M. Kennedy, Interest and Inflation Free Money, 1995, p.21

The principal idea of the creation of a monetary system not based on interest is the core idea and fundamental purpose of the JAK, a bank without interest.

HOW JAK BANK WORKS JAK has a simple structure, approximately 30 employees and a capital of approximately 7 million Euros. JAK has no physical bank branches, but customers can use online banking and phone banking for all of their financial needs. The bank operates with relative simplicity, solely with customer withdrawals, deposits and loans. JAK Medlesbamk, markets itself using a network of approximately 500 financially educated volunteers involved in the promotion of the bank and in financial counseling. JAK, basically, works like a mutual fund where members lend money to each other, in which the deposits do not bear interest and are not charged interest on loans. In practice the bank belongs to its socially conscious members, who contribute to its sustenance through the purchase of an annual share. The price of the share, understood as a membership fee, varies according to the age of the borrower and the size of his family. To receive a loan you must first make a deposit equal to 6% of the total amount of the requested loanâ&#x20AC;&#x2122;s value. The 6% required deposit is used to ensure your repayment of the loan to the bank. After the loan has been repaid in full, the member can withdraw the initial 6% deposit. The money raised from the purchases of yearly shares, together with the required loan deposit forms the EQUITY FUND. The members are all treated in the same way since the capital of each helps to build the capital from which all loans are taken. This collective pool of money is called the COMMON FUND, but instead of receiving interest, each saving deposit accumulates savings points which allow for larger loans to be taken; the points system is established on the basis of a formula determined by the JAK management(6).

( ) M. Anielski, An Assessment, cit., p.15-17

So, to accumulate savings points a member must make deposits in adequate amounts. Also, if a member doesnâ&#x20AC;&#x2122;t have enough savings points another member can intervene and give his savings points to the member in need, so to help him receive a larger loan. If a member has difficulty in repaying the debt with the bank, the network of JAK may intervene to support him. In detail: â&#x20AC;˘ Savings points: The savings points are what keeps the system in equilibrium. The amount of points earned depends on how much is deposited and on the length of time that you leave the money deposited in the bank. For example, one Euro deposited for one month generates one saving point, 100 Euro deposited for one month, is given a value of 100 savings points and so on.

â&#x20AC;˘ How to get a loan: When a member asks for a loan, the amount he can receive depends on how many savings points he has accumulated. Each loan is equivalent to a certain number of savings points that depend on the amount requested and the expected duration of the loan. If the member has accumulated the savings points required to qualify for a loan from the fund - by making deposits previously - he will receive the loan. He must then repay the principal amount of the loan plus an added commission that is charged on the transaction. The commission fee will cover the costs of administration and financial structure. At the end of the loan each applicant has the post-savings that has accrued during the entire amortization period. Each member is conditioned to save because the money used to repay the loan remains blocked for the duration of it. It is only possible to receive a second loan once the entire current loan is paid.

To receive a loan you must also posses the necessary and the classical guarantees required of the traditional banking system, both for individuals and for companies.

Source: M. Anielski, An Assessment of Sweden’s No-Interest Bank, 2004, p.13

• If the applicant for a loan doesn’t have the required amount of savings points: If the member - customer does not have enough savings points to obtain the requested amount of the loan, he must sign a contract to make further savings during the period of debt redemption. Thus, the rate of return on capital will add a second process consisting of additional savings. There is also the possibility that another member commits to pay the additional savings requirement for the period of the loan. The second member, a sort of guarantor, will not accumulate savings points for those deposits, but will allow the member who asked for the loan to be able to obtain it.

• The network as a further guaranty: The network created by the bank with members, volunteers and associations, also help the applicants in difficult situations. When those who have received funding fail to repay their debt, before proceeding to extreme measures, such as defaulting or foreclosing, the bank activates intermediate solutions, such as the deferral of

payments, temporary suspension of them or assistance from other members. The savings points from other members, can be used to help those in difficulty(7).

JAK Medlemsbank has low costs which are covered by charging an annual membership fee for members, which in Sweden is around 20 Euros. Moreover administrative costs are paid by a commission on loans, a synthetic index of cost approximately of 2.5%. Usually, JAK finances anything that is not overtly unethical, but it has not special constraints. There are specific lines for the funding of projects related to ecological sustainability. In this way JAK bank aims to increase environmental awareness and funding of the local economy, indeed the majority of their customers are individuals rather than small and medium enterprises.

TRADITIONAL BANK AND JAK BANK COMPARED The cooperative bank JAK differs from traditional banks in several respects. From an empathetic standpoint, the JAK bank appears to be more human: at first, the individual receives more respect, he feels a greater closeness and camaraderie with other members because he is part of a group, just and fair. Everyone can draw their own savings plan and obtaining a loan is very simple. Banking is easy and secure by means of phone and online opportunities. Moreover JAK gives people an opportunity to meet by organizing meetings and seminars to spread their ideology. It provides members the opportunity to realize post savings, accrued during the period of amortization at the end of the loan, that can be used for the next loan. Each person can decide to give up their savings points to other members, this embraces the social ideology of JAK banks. From a purely economic point of view, the most comparative advantage of JAK bank in respect to the other banks is that JAK saves their members from interests charges on loans which conventional banks apply. In the traditional banks most of their income 7

( ) M. Anielski, An Assessment, cit., p.30

derives from interest that people pay to borrow. Comparatively, the greatest expense in a traditional bank is the interest payments to depositors whereas this expense does not exist in the JAK bank. Another of the main features that differentiates JAK bank to a traditional bank is that there are no major shareholders that realize profits, as all members are also owners of the bank, and they save in order to give others the chance to contract loans. JAK applies the principle: one person one vote, so the decisions are taken collectively by the members. On the contrary, a traditional bank, conventionally, is made by major shareholders, who at the year-end share the profits, and, however, not all depositors are shareholders. Contrarily to what happens in a typical bank, JAK loans are granted depending on the liquidity of the savings of members, without making use of the interbank market or the financial markets. The process to obtain a loan in JAK is much simpler than that of a traditional bank: the agents of credit from the bank check the compliance of the applicant's situation to some parameters such as: the ability to repay the loan (which is the difference between the applicantâ&#x20AC;&#x2122;s income and expenses that he will face), and the presence of mortgage or personal guarantees(8). However negative aspects do exist, it is difficult for customers who have not made adequate deposits to obtain a large loan with JAK, especially for big sums, because of the size of post-savings. Especially for young families, that still have to save money, having to set aside a sum of money equal to the depreciation charge and that canâ&#x20AC;&#x2122;t be taken, it may be an enterprise of no small account. The system, in fact, is suitable for people who require loans in relation to their personal economic standing; hence, one wishes to ensure that the members could obtain loans without having to resort to the support of other banks. Besides, if a member saves for many years and never asks for a loan it is obvious that, in a system that does not accrue interests, the depositor will lose money because of inflation; the JAK system tries to solve this problem by giving the possibility to a member,

( ) M. Anielski, An Assessment, cit., p.33

who is not using the savings points accumulated, to give them away to another member who can benefits of them, in a socially respectful and conscious manner. Another criticism has been made to the JAK: that there is an implicit interest rate(9); according to some scholars the implicit interest of JAK is approximately 2/3% and represents a spread, that is a differential between the loan rate and the deposit rate calculated on the basis of a formula determined by the JAK management.

( ) Research by Leonardo Becchetti, chairman of the Ethics Committee of the Ethical Bank in Italy

Key Attributes

JAK bank

Conventional bank

Clients

A members-based, cooperative enterprise; one share, one vote.

Bank system

100% reserve system. Loans are lent out on the basis of the total liquidity (savings) in the system, thus loans are 100% supported by member savings and liquid assets. All money is fully secured.

Loans

Loans are issued on the basis of bank liquidity and the member’s income capacity to both save and repay the loan; loan repayment is only the principal of the loan. Does not charge interest on loans but does recover operating costs through an administrative loan fee. Does not pay interest on savings but does provide a means of earning savings points which are like interest income. JAK operates like a not-forprofit bank enterprise , with its members as “careholders” whose “returns” include interest cost savings on all loans.

Conventional corporate model with major shareholders and client-based. Fractional reserve system: Whenever a loan is issued, new money is created through two simple bookkeeping entries. The loan is largely unsupported by other member savings; only a small fraction of the loan needs to be secured by the private bank, under law, with the Central Bank. Loans are issued on the basis of credit worthiness (assets that support the loan); loan repayments include principle plus interest charges. Charges interest on all loans and credit.

Interest on loans

Interest on savings

Returns to investor

Pays interest on savings, but at current low interest rates these are minimal. Private banks have shareholders who receive returns in the form of share value and dividends that result from profits earned from interest rate spreads, user fees and other bank profits.

Source: M. Anielski, An Assessment of Sweden’s No-Interest Bank, 2004, p.7

CONCLUSIONS The JAK bank has obtained the results and reached their goals, through the support of local economies and small business entrepreneurs and helping to establish a sustainable economy, free from the concept of interest and free from the speculation. More and more people in Sweden are becoming members JAK and are using its financial products increasingly. Given the success achieved in Sweden, the financial model of JAK has already been replicated in Germany, specifically in Stuttgart where an interest free cooperative institution has been created, based on the same principles and core foundations of the JAK bank. Also in Italy, in the year 2008, the Italian Cultural Association JAK bank was created, sharing the moral, ethical, social, and mutualistic spirit of the Swedish JAK Medlemsbank. This Italian association was founded for two purposes: to spread the financial and economic methods that the JAK bank was based on, so that to create in Italy a bank like JAK(10). Therefore JAK bank is becoming a model to follow for many countries, certainly an innovative banking model that aims to socially help general business and not profit regarding interest. It has gone beyond the concept of cooperative banks, which, over time, has become very similar to traditional banks, in many cases losing sight of their social mission. This is not a banking model that could supplement the traditional banking structure, or that can erase poverty completely, but this experience and way of thinking, that is currently limited to some countries, may have its ideal application in less affluent social classes and among the poorest populations that have greater need for credit. Paradoxically, the poor classes of society, that have the greatest need for credit, have the greatest difficulty to obtain loans, and when they obtain them this happens to the more onerous conditions, according to the harsh law of the market. The world needs to know how to reconcile markets with social consciousness if we want to effectively combat the many forms of poverty still existing in contemporary society. We donâ&#x20AC;&#x2122;t know if an interest-free economy is really the best solution, but it certainly 10

( ) Source: Jak Italia website

represents a good attempt to obtain an economy more oriented to the social. <<We don‘t just look at people as individuals but we look to the community; we see the loan as mutual solidarity between people, this is JAK(11).>>

REFERENCES M. Anielski, An Assessment of Sweden’s No-Interest Bank, 2004 M. Kennedy, Interest and Inflation Free Money, 1995 S. Sciarelli, Etica e responsabilità sociale nell’impresa, Giuffrè, 2007

WEBSITES Jak Italy website: <<http://www.jakitalia.it/>> Jak Sweden website: <<http://jak.se/>> Anielski’s Jak bank report: <<http://www.anielski.com/Documents/The%20JAK%20Bank%20Report.pdf>>

( ) Words by Frank Magnus, director JAK bank