National Traveller MABS
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National Traveller MABS |
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Chapter
1: Chapter
2: Chapter
4: Chapter
5: Abstract
This
dissertation was inspired from my belief in credit unions and the viability
of community based interest free credit schemes. Throughout the period of my
research, I encountered many individuals and organisations whose valuable
input changed the course of my thinking radically, and made the road one of
immense discovery. My
contemplation on interest free credit schemes, has been born from the
failure of mainstream banks to meet the needs of marginalised, or
economically deprived, communities world-wide. Credit unions have attempted
to address this alienation by being more accessible to such communities.
However credit unions are limited in their efforts to address accessibility,
by their use of interest, which excludes many, whether it be for religious,
social or financial reasons. The
possibility of interest free credit unions is worth researching if the
excluded are to be included and access for all is to be achieved. The
theories supporting it are many, the most popular being rooted in economic
proof, social conscience and/or religious doctrine. While historically
interest was frowned upon, today it is mostly Islam that maintains this
stance, and therefore it is from Islamic literature that I draw most of the
theories. However the two case studies I have chosen to present, JAK in
Sweden and the Coolie Credit Fund in India, are neither Islamic nor credit
unions. This I feel adds great weight to
my argument, as it demonstrates how interest free credit schemes can
be adapted to suit the needs of communities in different social, religious,
cultural and economic settings. Their viability is explored through the
identification of their strengths and weaknesses. By drawing on these
strengths and weaknesses, I conclude that interest free credit unions are
viable if, and only if, an intersectoral approach to their operation is
developed. Therefore, within an efficient and effective institutional
framework that promotes socio-cultural responsibility and works towards
economic self-sufficiency, the viability of interest free credit unions can
be achieved. IntroductionStatement of the ProblemThe
basis of this study stems from the inability of marginalised or economically
deprived groups in many societies to gain access to non-exploitative credit.
Exploitative credit I believe, abuses the needs of the borrower, by charging
excessive interest rates, or excludes potential borrowers on the basis of
their present or past financial security. Exploitative interest rates can be
legal or illegal with commercial banks being an example of the former and
illegal moneylenders being an example of the latter. For the purpose of my
study however, I have chosen to concentrate on the legal forms of credit,
with particular emphasis on the mainstream banking sector. Globalisation
has resulted in mainstream capitalist banking becoming the norm worldwide.
As banks are profit making institutions, they cater not for the poor, who
are seen as high-risk, but rather for the better off in society. This has
led to the polarisation of mainstream credit facilities with the rich
gaining more access, while the poor find themselves increasingly alienated
from access to such credit, and are therefore often forced to rely on
illegal moneylenders who charge exorbitantly high interest rates,
(Ford:1991). However the problem is not simply one of accessibility. The
actual rates of interest cause problems for the economically marginalised.
Such rates fail to take account of external factors, such as bad harvests,
exchange rates or simply personal problems. Thus non-community based
financial institutions such as banks, building societies and post offices
ostracise those who do not meet the set criteria laid down by these
institutions and who do not have a constant cash flow. Credit
unions were developed to address this problem. The first credit union was
founded in Germany in 1849, by Freddrich Wilhelm Raiffeisen on the
principles of Christian charity and welfare work. Credit unions seek to
address the alienation of the more economically marginalised in society, by
building themselves around a common bond that people share. Such bonds may
be based on the community, on occupation, or on association. These common
bonds ensure members know and trust each other. Credit unions are owned by
all members and therefore seek to benefit all, by encouraging regular
savings and offering social lending of affordable loans at reasonable rates. However while credit unions come a long way in addressing the inaccessibility of credit for many marginalised groups, some would argue that they still fall short of meeting the needs of some. Such short falls may be due to the following: A.
Many credit unions, for example those in Ireland and Britain are slow to
invest in community enterprises or micro-finance projects within the
community. B.
Fixed interest rates on borrowing often act as a disincentive for
entrepreneurs when more competitive rates are available from banks for
productive borrowing. C.
The assurance of a fixed rate of return on loans by credit unions, (as is
the case for mainstream banks), results in a failure on the part of the
credit union to really investigate the viability both socially and
economically of loan investment. D.
The existence of a fixed rate of interest on borrowing alongside the payment
of dividends on profits means that when dividends are lower than actual
interest rates, members can pay more for borrowing than receive for saving.
This is important considering credit unions encourage people to borrow
rather than withdraw savings. E.
The growth of credit unions reduces the likelihood of all members being
known to each other. F.
The payment of interest on loans alienates Muslims and others who find the
charging of interest offensive. G.
The credit unions’ demand for (1) compulsory savings, (2) a pre-required
sum of savings before borrowing is allowed, and (3) regular loan repayments
alongside continued savings makes membership difficult for those not assured
of a regular income. The
above issues need to be addressed if all sectors in society are to have
access to fair credit. This dissertation seeks to address these issues by
exploring the viability of interest free credit. Such a system has strong
historical and religious foundations but can also be built on from both a
social and economic framework. Methodology
The
methodology I use is a series of literature reviews
which trace (a) the failure of mainstream banks to meet the needs of
many marginalised communities, (b) the establishment and spread of credit
unions as an attempt to counteract this failure and (c) the economic,
secular and religious arguments for interest free credit in order to further
enhance the possible benefits of credit unions for communities. These
reviews will be built on by analysing two case studies, which although not
credit unions officially, are very effective interest free community based
credit schemes. When I undertook this study, I was aware of the need within
certain communities, whether due to ideological, social or economic beliefs,
for interest free credit. My interest in this area was further influenced by
LETS Manchester, which aims to set up an interest free credit union as part
of their LETS community. Thus I set about identifying some interest free
credit unions in order to compare their operation to their interest bearing
counterparts. However while I seemed to have no problem identifying interest
free credit schemes, after many lengthy attempts, I failed to identify any
credit unions that did not give or take interest. Nevertheless I chose to
continue by using as my case studies, two interest free credit schemes, as I
believe credit unions can learn from such schemes, just as such schemes can
learn from credit unions. Therefore by drawing on the strengths and
weaknesses visible in the case studies presented, I argue on the viability
of interest free credit unions. Summary
In
Chapter 1, I begin by reflecting on the historical background to money,
interest and credit. I then place the above in the context of mainstream
banks and look closer at the role of such banks in society; how they
developed and how they are run, both philosophically and practically. I also
question who exactly benefits from the banking system by looking at the
failure of mainstream forms of banking in meeting the needs of economically
marginalised communities. Within Chapter
2, I identify how credit unions were founded in an attempt to address
this failure in the banking system. I detail the philosophy behind, and the
practical running of credit unions. I also account for the success of credit
unions in meeting the needs of many people excluded from accessing credit in
the mainstream banking sector. However the failure of some marginalised
people to access this credit is identified, and with this identification I
move on to an alternative, outlined in the following chapter. In Chapter 3, I develop an argument for interest free loans using historical,
social and economic reasoning. I consider Islamic teaching on credit, and
look briefly at the ideology behind such teachings. The economic workings of
interest free banking in Islam are described in detail under three headings
identifying both its benefits and limitations. Chapter 4 analyses practical examples of interest free credit. I
examine two case studies, and while neither of them are credit unions as
described in chapter 2, they are nevertheless community based credit schemes
which operate on a similar philosophy to credit unions. I believe they can
therefore be used to promote the viability of interest free credit unions.
The financial, economic and political viability of interest free banking is
discussed in relation to the cases outlined, and the issue of accessibility
is emphasised. Strengths and weaknesses with such projects are identified,
by drawing on the limitations of interest free banking, and reflecting on
the implications of such a system for individuals, communities and the world
at large. Finally in chapter
5, I
give a brief synopsis of my study and draw my findings together by
re-emphasising the conditions under which interest free credit unions are
viable. I conclude by presenting the limitations of my dissertation. We want your feedback on our web site please click here to sign our guest book or click here to view our guest book.
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