Interest-Free Finance

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Mike Lewis and Pat Conaty:

"Credit unions originate in rural action to combat usury.The first credit union was founded in 1849 in a rural town in the German Rhineland where farmers were losing their cattle to lenders and having to sell their land to settle debts. As a solution, Friedrich Raiffeisen, the local mayor, proposed a savings and lending co-operative. As with other co-operatives, a savings dividend acted as the members’ incentive to save.This experience formed the model for the international credit union movement.

There have also been co-operative and mutual experiments that did not use dividends or interest rates to incentivize savings. In 1775, Richard Ketley, a Birmingham publican, set up a mutual savings fund on rotational principles to allow savers to put aside money to build a house.Members periodically drew lots to allocate funds until in due course every saver had received a capital sum to build a home, and the fund was terminated. This system gave rise to the building society movement internationally and inspired the mutual savings and loan movement in North America.

In the 1840s, another Englishman, Thomas Bowkett set up similar rotational savings societies in order to allocate smaller loans to savers. Like the first “terminating” building societies, these Starr-Bowkett societies did not use a dividend or an interest rate to persuade people to save.They operated successfully for decades, spread to Australia and continued to trade until the 1960s. Behind all these experiments was a deeply rooted, ethical social investment movement.The co-operative pioneers in fact were all seeking viable alternatives to avoid the usurious practices of banks and pawnbrokers. In the 1850s in the U.S.A., Edward Kellogg andWilliam Greene set out practical proposals for interest-free mutual banks.

In Denmark in the 1930s, another group of farmers facing repossession by banks set up a system that continues to operate successfully today. Building upon earlier practices of interest-free systems in Germany, Christian Christiansen championed the founding of a number of rural savings and loan co-operatives that went by the acronym JAK, short for (“Land Labour Capital”).

The personal savings and community benefits that have accrued to members of this democratic co-operative finance system are testimony to the dramatic impacts that can be realized by moving from charging compound interest to a fee-based approach to lending. Sweden is now home to the largest number of JAK branches and members. Started in 1965, the co-op expanded rapidly in the late 1980s and secured a banking license in 1998.Today JAK has 35,000 members in Sweden,US$163 million in assets, and $147 million out on loan. It operates on the basis of mutual aid and financial reciprocity amongst its membership. JAK members agree to pool their savings and then lend them to one another, interest-free, for mortgages, home improvement, student loans, etc.

JAK Bank is based in Skövde but has 30 local branches and a large number of JAK member groups across the country. To keep overheads low, the local branches rely heavily on the assistance of 650 community-based volunteers, trained by JAK staff in interest-free lending principles and practices.These volunteers recruit new members through the JAK newspaper and educational events in the local areas. Volunteers can tap into a number of JAK systems to assist them with community engagement, including internet services and on-line forums.A JAK school conducts courses for volunteers and members." (makingwaves volume 20, number 3)