Community Development Banks: Enabling Access to Finance for Poor Communities

This is part of a series of think pieces by scholars and practitioners working on a broad range of issues within the field of Social and Solidarity Economy. The series is being published in conjunction with the UNRISD conference “Potential and Limits of Social and Solidarity Economy”. The conference took place on 6-8 May 2013 in collaboration with the International Labour Organization and the UN Non-Governmental Liaison Service.

Community Development Banks (CDBs) are a growing and dynamic manifestation of the solidarity economy in Brazil. This unique system of solidarity finance is currently in place in more than 100 Brazilian municipalities. Created by local associations to (re)organize local economies, they develop financial tools (microcredit, social currency, correspondent banking) governed and organized by the users themselves. In this article, we outline a general overview of these initiatives. First, we explain some characteristics of CDBs. Second, we present the experience of two CDBs, Banco Palmas and Banco Bem, which have excelled in promoting access to the means of production, consumption, education and training for large sections of the population of the neighbourhoods in which they work. Finally, we study the relations between these CDBs and public banks.

Camille Meyer is a PhD candidate at the Université libre de Bruxelles (Belgium) with previous degrees in both European and development studies. His research interests are social finance (microfinance and social currencies), common goods, and facilitators in social economy.

Leonardo Leal is a member of the Incubator in Solidarity Economy and Territorial Development Management at the Federal University of Bahia (UFBA-Brazil) UFBA. Since 2007, he has been coordinating the development and expertise of diverse solidarity economy initiatives in Brazil, especially community development banks in the north-east region.

Introduction

With over 100 solidarity economy initiatives in Brazil (Melo and Braz 2013), understanding the phenomenon of Community Development Banks (CDBs) is increasingly important. For one, CDBs are logical responses to a financial system that keeps 40% of the population excluded from access to financial services and banking (according to data from the Financial Inclusion Project from Central Bank). In addition, CDBs are evidence of a dynamic civil society concerned with fundamental public issues, aiming to democratize financial resources so that finance serves the needs of all (Meyer 2013).

In this article, we first introduce some of the principles that guide the actions of CDBs. Second, we present the experiences of two CDBs, Banco Palmas and Banco Bem, which have excelled in promoting access to means of production, consumption, education and training for large sections of the population of the neighbourhoods in which they work. Finally, we study the relations between these CDBs and public banks and how they affect the provision of financial services to the community.

CDBs as a dynamic of the solidarity economy

CDBs serve the populations of poor and marginalized areas by financing and advising solidarity enterprises. They stimulate the creation of local networks, promoting endogenous development in order to generate employment and revenue. To do this, CDBs consider it necessary to relocate capital and more generally to strengthen local economies. The concept of “integrated territorial development” as developed by CDBs (Melo and Braz 2013) goes beyond strictly economic indicators and therefore fits a definition of multidimensional wealth creation that is both quantitative (job creation, increased income, and so on) and qualitative (for example, generating social cohesion, reducing domestic violence, access to education). Thus, CDBs understand "development" as strengthening endogenous forces in the community: they promote the regional capacities by creating and stimulating local networks of producers and consumers.

To do so, CDBs offer the community a range of financial and non-financial services, such as vocational training programmes and support for business start-ups. As CDBs are located in areas with high levels of financial exclusion, they are faced with a high demand for credit and money access. For this reason, CDBs offer loans in two currencies: productive loans which are given in the national currency, and consumption loans which are offered in a locally circulating social currency. With this mechanism, CDBs stimulate local production through a funding stream (microcredit) and encourage local consumption with the social currency. In doing so, CDBs are able to re-organize poor economies through the combined stimulation of supply and demand.

CDBs grew out of organized social movements, such as associations and trade unions. These associations govern by creating a local public space, or forum, in which citizens and managers decide together on the CDBs’ role in local development, for example by selecting the financial and non-financial products the bank can create to improve the inhabitants’ living conditions. Through these associations and forums, CDBs are established and administrated by their own users in a democratic and participatory way. CDBs forums can be considered open spaces where local users govern the activity of the bank themselves, and do so as common goods institutions (Ostrom 1990).

We will now present how those communally owned financial institutions contribute to the local development of poor territories and which tools they have created to enable this development.

The Banco Palmas and Banco Bem

The first Brazilian CDB, Banco Palmas, emerged from the experience of a neighbourhood association in the Conjunto Palmeiras, a suburb of the city of Fortaleza. The Association of the Residents of Conjunto Palmeiras (Asmoconp) was first created to mobilize its citizens in order to manage the urbanization of the community. With time it increased its ability to mobilize people and resources. In 1998 the Asmoconp created Banco Palmas which managed to capture a considerable amount of resources to provide microcredit, create solidarity economy enterprises, create the social currency Palmas (P$) and offer banking services through partnerships with public banks (known as correspondent banking).

To stimulate the endogenous development of the district, Banco Palmas has developed different types of microloans, which differ according to the purpose of the loan (consumption, production or service provision), varying interest rates, payment period, and if the credit is released in Real (R$ the official currency) or in Palmas (the social currency). The latter type of credit is intended for household consumption, which is usually used to buy additional food, medicines, or any other consumer needs. This credit is released only in Palmas and is initially limited to 50 R$ ($1= R$2.37, August 2013). An administrative fee of 1 per cent is charged.

The productive loans are generally used to finance informal entrepreneurial activities. In 2011, Banco Palmas granted 4,714 loans for a total of 2,604,098.06 R$ (more than one million dollars). Ranging from 50 to 15,000 R$ (circa 20 to 6,300 dollars), interest rates range from 1.5% to 3.5% per month, with a payment period of 4 to 12 months. Banco Palmas makes the loan appraisal on its own through its community loan officers (who are young members of the community) and a Credit Assessment Committee (CAC), composed of other members of Banco Palmas. The community loan officers visit the borrower and consult his or her neighbourhood in order to obtain information about the reliability of the client. Based on this information, the CAC decides whether to approve the loan.

The social currency Palmas functions to encourage local consumption. This currency is accepted only in the network of 250 shops accredited by Banco Palmas and only circulates in the Conjunto Palmeiras area. It internalizes community incomes since consumers who previously purchased goods outside the neighbourhood, are thus motivated to consume inside the district. They can access this social money by either applying for consumer credit, by changing their Real into Palmas, or by receiving a portion of their wages in social currency (França Filho et al. 2012).

In 2006, after eight years of activity, Banco Palmas made an agreement with Banco Popular do Brazil (a Brazilian public bank) in order to expand the supply of services to the community by offering basic banking services (payment of bills, withdrawals, opening checking accounts, among others). Through the agreement, Banco Palmas works as correspondent bank for this public bank, meaning it provides financial services on behalf of the bank. In 2011 it registered more than 234,000 transactions, worth 27,727,791.97 R$ (circa 12 million dollars). It is noteworthy that Banco Palmas received a fee for providing these services. It is also worth pointing out that the bank branch nearest to the Conjunto Palmeiras is more than 10 miles away.

Since Banco Palmas was founded, other CDB initiatives have flourished in Brazil. Banco Bem (literally the “Good Bank”) was one of the first CDBs to apply Banco Palmas’ principles and methodologies. Located in the outskirts of the city of Vitória (State of Espirito Santo), Banco Bem grew out of the partnership between a local association and a group of seamstresses. The association between organizations of both popular and solidarity economy gave birth to Banco Bem in 2006.

Originally, formal and informal leaders came together to prepare and approve Banco Bem credit policy, defining the purpose of the loans, their amounts, interest rates and payment terms. These meetings were organized within a community forum, named “Forum Greater Good”. Banco Bem also created the social currency "Bem", using the same mechanism that worked at Banco Palmas. Like Banco Palmas, Banco Bem acts as a development platform for the neighbourhood, offering financial services such as credit for production, consumption and housing, as well as correspondent banking, guidance and monitoring to set up and manage individual and collective enterprises. Nowadays, the bank estimates that over 15,000 people benefit from its financial services, in a territory of 31,000 inhabitants.¹

Expansion of the CDBs through public and market partnerships

Relations between CDBs and public sector banks have evolved significantly. In 2003, before Banco Palmas started collaborating with Banco Popular do Brazil, the Brazilian Central Bank sued Banco Palmas because of the Palmas social currency. The reason given was that the issue of paper money was against the exclusive constitutional jurisdiction of the Central Bank in terms of monetary issue and control of money supply. The Central Bank lost its lawsuit against the community bank since the social currency had not affected the normal circulation of the Real. Following this trial, the Central Bank became interested in better understanding this financial inclusion device and led several studies on social currencies and CDBs. This recognition of the social value of CDBs was later formalized in 2009 through the development of a technical paper produced jointly by the Central Bank and the National Secretariat of Solidarity Economy (SENAES). However, there is still no appropriate legal status for CDBs.

Nevertheless, this regulatory failure has not prevented Banco Palmas and Banco Bem from establishing various partnerships with national government. Indeed, they are now working closely with SENAES, which falls under the Ministry of Labour and Employment. Banco Palmas now coordinates CDBs at the national level, responsible for the dissemination of the methodology into new areas and the consolidation of existing CDBs. Banco Bem is itself responsible for disseminating CDB methods and know-how in the Central West region. It has become a key reference in the extension of the model. Two universities are also actors in the extension of the model, helping to construct and consolidate CDBs in their respective region: the Technology Incubator in Solidarity Economy from the Federal University of Bahia (ITES / UFBA) for the north-eastern region, and the Nucleus of Solidarity Economy from the University of São Paulo (Nesol / USP) for the south-eastern region.

Throughout the history of Banco Palmas and Banco Bem, one of the major obstacles to boosting local economies of the neighbourhoods where they operate has always been the lack of financial resources. These banks did not have sufficient resources to allocate funds in the outskirts’ economies, so it was difficult to promote the local development with only minor credits, obstructing investments and the creation of new ventures. Considering this fact, CDBs opened a dialogue with the Brazilian public banks, especially the Federal Savings Bank (Caixa Econômica Federal), the Brazilian Development Bank (Banco Nacional do Desenvolvimento - BNDES), the Bank of Northeast Brazil (Banco do Nordeste do Brasil - BNB) and the Development Bank of the State of Espirito Santo (Banco de Desenvolvimento do Estado do Espirito Santo - BANDES).

The partnerships with financial markets permit an increase in the banks’ capital and thus serve to scale-up their activities, the impact on poverty reduction and the stimulation of local economies. For instance, in 2005 Banco Palmas signed its first contract with the Banco popular do Brasil. This agreement resulted in an increase of its portfolio from 30,000 to 1,000,000 R$ (circa 13,000 to 422,000 dollars). In 2010, it negotiated a contract with the BNDES for 3,000,000 R$ (circa 1,000,000 dollars). The rise in capital enabled the community bank to lend more to the community, as well as allowing it to diversify its financial products. For example, Banco Palmas developed the Projeto ELAS, a loan designed especially for the women beneficiaries of the Bolsa familia (a federal conditional cash transfer programme) in order to encourage them to create their own productive activities. Banco Palmas also signed a commercial agreement with the insurance company Zurich to create life micro-insurance for the community's inhabitants. For its part, Banco Bem signed an agreement with the State development bank BANDES to increase its capital resources. In 2012, it made more than 50,000 R$ (circa 21,000 dollars) in loans available to local enterprises through Productive Credit Program Capixaba, with 90% going toward informal economic activities. Both banks made an agreement with Caixa Econômica Federal to conduct correspondent banking activities. The CDBs provide banking services (e.g. payments, withdrawals, transfers) to the communities' inhabitants on behalf of this bank and so contribute to their financial inclusion.

Despite the advances these agreements have achieved in terms of outcomes for community banks and their communities, it should be noted that relations between banks and public companies affect CDBs insofar as they insert issues such as efficiency, management capacity, financial profitability, return rates, among others, into their agendas. This results in a certain institutional isomorphism—whereby the two types of bank become similar to each other—since the CDBs adopt management practices and technologies in financial services from conventional financial institutions. These tensions can be better understood if one considers the microfinance and correspondent banking services that both Palmas and Bem CDBs offer their communities through contracts with the public bank Caixa Econômica Federal. The CDBs have now adopted criteria for granting microcredit that were not used before the involvement of Caixa: they have taken up criteria used by traditional banks, such as consulting credit protection systems and including clients in these systems in case of default. The correspondent banking services through contract with Caixa have introduced another point of tension. The CDBs have increased their security measures such as security guards, armoured cars and new building standards for reception areas because the CDBs believe that providing a correspondent banking service significantly increases the risk of burglary.

However, it is worth pointing out that these changes have not altered the principles that guide the endogenous development perspective that CDBs bring to these communities. In fact, these contracts serve as a medium to reach these goals that complement the other actions developed by CDBs.

Conclusion

In summary, CDBs enable the provision of financial resources to promote investment in both economic activities and units of consumption, for a population that has little access to the conventional, formal financial system. In this piece we have emphasized the need for open spaces for organized communities to develop and manage their solidarity finance systems, such as community development banks. Recognizing CDBs as an effective financial institution constitutes a recognition of both the autonomy of society to establish and manage its own systems to manage and allocate financial resources and the vitality of self-organizing systems. Therefore, besides strengthening the CDBs’ capacities for financial services provision, partnerships with public banks represent an official recognition of CDBs' social and financial missions.



REFERENCES

França Filho, G., A. Scalfoni, J. Silva Junior and C. Meyer. 2012. L'enjeu de l'usage des monnaies sociales dans les banques communautaires de développement au Brésil: étude de cas de la Banque Palmas. Revue internationale de l’économie sociale – Recma. No. 324, pp.70-86.

Melo, J. and J.B. Braz. (eds.), 2013. Banco Palmas – Resistindo e inovando. A9 Editora, São Paulo.

Meyer, C. 2013. Les finances solidaires comme biens communs durables: étude de cas de la Banque communautaire de développement Palmas (Brésil). Éditions Luc Pire, Liège.

Ostrom, E. 1990. Governing the Commons: The Evolution of Institutions for Collective Action. Cambridge University Press, Cambridge.


FOOTNOTE
¹See http://www.ateliedeideias.org.br/, accessed on 17 September 2013