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How might traditional banks participate effectively in the financial rehabilitation of the communities they serve? Here’s just one possibility:
Sam’s Pizzeria is thriving as a local business, and Sam needs $200,000 to expand the dining room and build a second restroom. Normally, the bank would evaluate his business and credit and then either reject his loan request or give him the money at around 8 percent interest. The risk is that he won’t get enough new business to fill the new space, won’t be able to pay back the loan, and will go out of business. Indeed, part of the cost of the loan is that speculative risk.
In another approach, the banker could make Sam a different offer. The bank could agree to put up $100,000 toward the expansion project at 8 percent if Sam is able to raise the other $100,000 from his community in the form of market money: Sam is to sell digital coupons for $120 worth of pizza at the expanded restaurant at a cost of $100 per coupon. The bank can supply the software and administrate the escrow. If Sam can’t raise the money, then it proves the community wasn’t ready, and the bank can return everyone’s money.
If he does raise the money, then the bank has gained the security of a terrific community buy-in. Sam got his money more cheaply than if he borrowed the whole sum from the bank, because he can pay back the interest in retail-priced pizza. The community lenders have earned a fast 20 percent on their money—far more than they could earn in a bank or mutual fund. And it’s an investment that pays all sorts of other dividends: a more thriving downtown, more customers for other local businesses, better real-estate values, a higher tax base, better public schools, and so on. These are benefits one can’t see when buying stocks or abstract derivatives. Meanwhile, all the local “investors” now have a stake in the restaurant’s staying open at least long enough for them to cash in all their coupons. That’s good motivation to publicize it, take friends out to eat there, and contribute to its success.
For its part, the bank has diversified its range of services, bet on the possibility that community currencies will gain traction, and demonstrated a willingness to do something other than extract value from a community. The bank becomes a community partner, helping a local region invest in itself. The approach also provides the bank with a great hedge against continued deflation, hyperinflation, or growing consumer dissatisfaction with Wall Street and centrally issued money. If capital lending continues to contract as a business sector, the bank has already positioned itself to function as more of a service company—providing the authentication and financial expertise small businesses still need to thrive.
The bank transforms itself from an agent of debt to a catalyst for distribution and circulation. Like money in a digital age, it becomes less a thing of value in itself than a way of fostering the value creation and exchange of others.
This article has been adapted from Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity.