CNBC Business | Bank Balancers

Bank Balancers

The chastened banking sector is ceding large parts of its core business to savvy, ethically armed entrepreneurs. Richard Lofthouse reports

Thanks to a shift in culture enforced by wholesale change in the regulatory environment of financial services, a nicer capitalism may be in sight. But, at root, all that needs to happen is for banks to return to their historical function.  

“In essence, a bank is an organisation that brings two groups of people together: people who have money to spare and people who need it,” says Peter Blom, CEO of ethical bank Triodos Group. “Then a bank adds its knowledge and expertise to this mix. If you move away from that basic principle, and into a more abstract world, you lose sight of what is imaginary and what is real.”  

The new banks fall broadly into two camps – organisations that lend money to sections of society spurned by commercial banks, and organisations that are bringing elementary banking services to the unbanked, whether in the form of mobile banking or innovative money transfer services addressing the need created by the growth in global migrants. Some are for-profit, some not-for-profit. What they all have in common is deep-seated aversion to the current state of affairs allied to an alternative, more sustainable vision of capitalism – not forgetting that the world’s ‘shadow’ economy of cash and barter has its own logic when conventional banking fails.

Fredericks Foundation  

Founder & CEO: PAUL BARRY-WALSH 
fredericksfoundation.org 

A very successful entrepreneur in his own right, Paul Barry-Walsh decided eight years ago that he would found a micro-loan charity aimed not at poor communities in emerging markets but at disadvantaged people in the UK who could not get started in work because they were refused small loans by high-street banks.  

Since then, he has helped create hundreds of small businesses by loaning as little as €1,150 for the purchase of essential tools or transport. The purpose of the charity is to help “disadvantaged people to start their own business as a means to achieve financial independence and renewed confidence and self-esteem”.  

Barry-Walsh expects to loan €400,000 this year, receiving income from a mixture of self-subsidy, government aid and income from other for-profit start-ups that he helped to set up expressly for that purpose. Because 85% of the loans are repaid, a high figure in this sector, much of the money gets recycled again and again. His major expense is paying eight client managers, who provide hands-on assistance to loan recipients, while Barry-Walsh subsidises administrative overheads and office rent from his own pocket. 

A typical recipient is someone with a bad credit rating, unemployed, stuck on welfare benefits yet willing to work. Everyone from window cleaners to landscape gardeners have had their lucky break through Fredericks. Barry-Walsh says that he robustly rejects scroungers, yet equally he tries to extend help even to applicants with a criminal record, or on one occasion an individual with cancer (he made  a full recovery).  

The only prerequisite for applying for a loan is that the applicant has been rejected by the bank. Earlier this year Barry-Walsh picked up the CNBC European Business Leader of the Year philanthropy award, citing that for every 100 people helped by his foundation, the UK taxpayer is saved £3m (€3.3m) in direct costs. A veteran of several start-ups, not all of them successful, Barry-Walsh made his big break with a computer and dealing room disaster recovery business called Safety Net, which was sold for £180m 10 years ago. 

MYC4 

Founder: MADS KJÆR 
myc4.com 

Based on the microfinance model, championed by Muhammad Yunus’ Grameen Bank in Bangladesh, but abandoning the cooperative element for a for-profit model, MYC4 is an online marketplace that connects investors  with African entrepreneurs who lack  the capital to grow their businesses. It was founded in May 2006 as a joint venture between Mads Kjær, Tim Vang and Kjær Group. 

MYC4 insists that business, not aid, is the best recipe for sustainable African prosperity, striving to “strike a balance between running a profitable business, allowing all partners involved in the process of financing the loans to African entrepreneurs to earn a fair, risk-adjusted return, while at the same time ensuring fair and flexible terms to the entrepreneurs”.  

Investors upload money into their accounts, select businesses and then bid to offer a loan at a particular interest rate, which recipients repay in monthly instalments. Loans are typically anything between €100 and €100,000, most being micro-sums. 

“Providers” on the ground screen the businesses and upload the details to the MYC4 site. With this model, says Kjær, everyone wins: the borrowers get the loan at a rate they can repay; the investors earn income from the interest; and MYC4 gets 3% from the borrower over time. The Provider and the Lender will also charge a fee for their services. Due to the nature of the open bidding process, the model ends up providing a self-regulated marketplace that encourages the borrowers and providers to perform well and the investors to offer low interest rates. The loans are repaid monthly with an incentive for the borrower to repay as early as possible since the interest rate is applied on a declining balance basis. Early or on-time repayment also gives borrowers a good track record, allowing them to apply for a bigger loan next time.  

Within MYC4’s first three years, 14,443 investors from 89 countries have invested €7,884,554 in 4,243 businesses in seven African countries. The average interest rate for investors is 13% per annum before defaults and currency fluctuations — high by European standards but much lower than the rates charged by local banks. “African business don’t want charity,” insists Kjaer. “Africa is not a nutcase, it’s a business case. It’s ironic that we’re putting plans together for billions of dollars for Western banks but the rescue plans for developing countries is peanuts.”

Shared Interest 

MD: PATRICIA ALEXANDER 
shared-interest.com 

Founded by venture capitalist Mark Hayes in 1990, the idea for Shared Interest arose from pioneering UK fair trade retailer Traidcraft. Faced with consumer demand for fair trade products that its producers couldn’t meet, Traidcraft wanted to get more involved in helping them develop their businesses. The result was an Industrial and Provident society — not dissimilar to a credit union — that today has around €30m invested in developing world producers of coffee, cocoa, handicrafts and textiles.  

The society is a not-for-profit company rather than a charity, although there is also a charitable arm. Individuals invest (rather than deposit) money that is loaned at the lowest possible rates to producers, typically at interest rates in the 4%—8% range (compared to 30%—45% by many local banks in perceived high-risk markets such as Nicaragua). Around 8,700 UK investors do not currently receive any return on their investment, but neither has anyone ever lost their capital, which despite being technically unsecured is recovered at a rate of 98% or more.  

Shared Interest’s uniqueness as one of a growing number of community development finance institutions rests on its exclusive link to fair trade, the idea that a ‘fair’ (rather than purely market driven) price should be paid by the Developed World to the Developing, allied to other forms of social equity. In 2007, fair trade-certified sales amounted to around €2.3bn worldwide, a 47% year-on-year increase. Half of them were in the UK, which dominates the sector.  

Mutual Private Bank

 Founder: STEPHEN TALL
 mutualprivatebank.com 

Fort Worth, Texas-based Stephen Tall is making the recession an excuse for bold innovation in a sector more associated with dark suit conservatism. Laid off last December as deputy head of a major family office, he is now pursuing a long-held dream of founding a high-net worth investment company based on the mutual bank model.  

Mutuality has a 200-year track record, with most building societies and mutual banks typically serving local communities, taking deposits as savings and then lending the money as mortgages. Today, there are an estimated 530 mutual banks in the US, 55 building societies in the UK and 11 Bausparkassen in Germany plus a handful of equivalents in other European countries. However, until now no one has applied the idea to the wealth management sector. 

Originally inspired by legendary US investor John Bogle’s book The Battle for the Soul of Capitalism, Tall saw at first hand how publicly owned investment companies sit atop a monumental conflict of fiduciary interests. Claiming unswerving loyalty to clients, whose wealth they manage, such companies also have to satisfy shareholders whose only concern is fee income and growth.  

Tall says this conflict is particularly acute where high-net-worth individuals and families are concerned, since they want a ‘forever’ model of stability, not a bank that lays off staff at the first sign of a recession. A mutual private bank, he says, would offer both longevity and clarity of purpose, having no shareholders, only members with limited voting rights.  

The Bogle connection is timely since he founded the first index tracker fund in 1975, the Vanguard 500, insisting that a low-fee, stock market tracking fund would do better over the long term than the majority of actively managed funds. In the wake of Madoff, it’s a view gaining widespread attention.  

Planning a formal opening later this year, Tall is raising $5m (€3.8m) in start-up costs, pledged deposits of $15m (€11.4m), and $750m (€570m) of managed assets. He believes the project will begin with the support of between eight and 15 family offices, high-net-worth individuals and existing institutions, all determined to find better value for their money than was possible under the shareholder model of investment management. 

Zopa  

CEO: GILES ANDREWS 
zopa.com 

Zopa is the world’s first person-to-person (P2P) online lending exchange, where people lend and borrow money with no bank in between. UK-based Zopa, which also operates in Italy and is building a Japanese outfit, has arranged more than €38m in loans between more than 250,000 members, and was recognised as the “Most Threatening Non-bank Competitor” at last year’s Retail Banker International awards. 

Launched in March 2005, Zopa stands for “zone of possible agreement” — the point where two people’s appetite to do a deal overlaps. Through its website, lenders declare how much they want to lend, at what rate, to which kind of customer, and borrowers bid for the money. Lenders pay Zopa an annual fee of 1% on the money they lend, and borrowers pay a fixed fee that is added to their loan. All borrowers are identity-checked, credit-scored and risk-assessed, and anybody lending €544 or more has their money spread across at least 50 borrowers. The default rate on Zopa loans since launch has been 0.3%. 

The venture was conceived by three of the brains behind the Egg online banking brand, which was designed to be less formal than traditional high-street banks. Growth of Zopa over the last year has accelerated, as the credit crisis has left borrowers unable to obtain loans at reasonable rates — if at all — from banks, and savers’ returns slashed by successive base rate cuts. In January, Zopa arranged €2.4m of loans, which rose in February to €2.7m, a 126% rise on February 2008 and the largest volume of loans it  has yet arranged in  one month. 

Not all of Zopa’s ideas have been successful — an exploratory venture in the US is being wound down — and the company has yet to attract as many borrowers as lenders. On new loans made in the last year, Zopa lenders are enjoying average returns of more than 9% per annum after charges, while borrowers, depending on their Zopa risk rating, have been able to obtain loans at rates of around 8% to 12% — cheaper than those offered by conventional banks.  

Giles Andrews, co-founder and now chief executive of Zopa, says: “While most people have had their faith and trust in banks shaken to the core, our members have continued to enjoy the unique advantages of this modern version of mutuality. By dealing with other people rather than the banks, both borrowers and lenders get a much better deal and the satisfaction of bypassing the banks.”  

The Zopa model has since spawned more than 20 P2P platforms in 14 developed countries, with a further 10 on the blocks. Over €75m was lent via P2P platforms in 2007 and Online Banking Report predicts that this will rise to €750m by 2010. While Zopa’s Italian operation was set up as a franchise, in Japan it is pursuing a joint venture partnership — its favoured structure for future expansion. 

ZAIN  

Group CEO: Dr Saad Al Barrak 
zain.com

Mobile banking is getting a lot of press these days, but in Europe it may evolve as little more than the convergence of existing online banking services with internet-enabled smart phones. When contactless payments become normal, they will be at the behest of existing high-street banks.  

The real revolution is taking place in the developing world, and Africa in particular, where telecom providers have a golden opportunity to become bankers to the unbanked. The best-established example is Kenya’s Safaricom (part of the Vodafone Group), which has evolved M-PESA, a mobile service for the transfer of small sums of money and the payment of utility bills. This aspect of mobile commerce is very popular in countries where many have no access to banking or fixed-line telephony. 

Several Latin American countries have comparable services from providers such as Redeban and Omnilife, while Iran recently got in on the act via domestic banks such as Parsian and Tejarat. But the newest kid on the block is Zain, which has just launched a mobile money transfer business, known as ZAP, in Kenya and other African countries. With a footprint spanning 23 countries across the Middle East and Africa providing mobile voice and data services to 63.5 million active customers, Zain’s potential to effectively create a borderless single market for payments rests on its One Network, the world’s first borderless mobile telecommunication network enabling customers to receive and make calls throughout countries in Africa and the Middle East at free or local rates. Zain is owned by Kuwait stock exchange-listed Mobile Telecommunications Company.

Grameen Bank 

Founder: Muhammad Yunus 
grameen-info.org 

Grameen Bank pioneered the micro-credit movement in Bangladesh in the 1970s, leading to its founder Muhammad Yunus winning the Nobel Peace Prize in 2006. Originally trained as an academic economist, Yunus decided to help 42 villagers in Jobra, adjacent to Chittagong University, cutting them free from loan sharks for just $27 at a time when the country was embroiled in famine. Three decades later and Grameen Bank covers the entire 150m population of Bangladesh and has cumulatively disbursed over $7bn (€5.3bn) in micro loans. 

The most remarkable fact of Grameen is not just its founder’s vision and dedication, but the way in which the organisation has matured, providing a model for other emerging economies.  

By loaning only to groups of five people, the bank has achieved an astonishing repayment rate of 98%, despite requiring no collateral for its loans. The fact that 97% of its loans are to women is also a remarkable reversal of the industry norm and has driven a social revolution in Bangladesh.  

Arguably, the biggest lesson learned followed the terrible floods of 1998, when many borrowers lost their homes and their livelihoods. This led to disgruntlement with the strict conditions of repayment and the threat of mass-default. The result was the evolution of a much more flexible architecture of loans, collectively called Grameen Bank II, and numerous types of crafted loans towards educational or house purchase objectives. One of the most successful such projects has involved getting telecommunications out to villages where there are none. Women receive tiny loans to enable them to buy a mobile phone, sharing it with the village for a small, per-call fee. So far over 300,000 ‘telephone women’ have taken advantage.  

Earlier this year Yunus told CNBC that he was unhappy that so many other so-called micro-credit schemes were springing up that were for-profit but not cooperative, an unacceptable dilution of the original concept in his view because it returns to an inequitable model where a few people get rich because of the hard work of the poor. At Grameen bank, all profits are distributed to the bank’s members in the form of a dividend.  

La Caixa  

CEO: JUAN MARÍA  NIN BARRAK
 portal.lacaixa.es

The World Bank estimates that worldwide there were 175 million migrants in 2005, the remittances from whom were in excess of $232bn (€176bn), the majority being sent back to emerging markets. Money transfer services are booming as a result, yet most offer a poor, expensive service with all sorts of charges and commissions added.  

There are opportunities for transfer services that lower costs, whether by leveraging new technology or by operating a less-aggressive for-profit model. Europe’s leading example is Barcelona-based La Caixa, Spain’s largest savings bank and it’s largest charity, having been founded on a not-for-profit basis. 

Its most innovative product allows low-cost transfers via cooperation with banks in Argentina, Colombia, Dominican Republic, Ecuador, Peru and Morocco. La Caixa provides two bank cards, one for the migrant and another for their relative. The migrant deposits money on the card via a phone or online; the relative can then retrieve the money at an ATM or spend it by using their card as a debit card. 

Triodos 

CEO: PETER BLOM
 triodos.com

Triodos is the role model for an ethical ‘alternative’ bank. Celebrating its 30th anniversary next year, the Dutch bank already has branches in Belgium, the UK, Spain and Germany. It has approximately €3.5bn in funds under management, is a for-profit insitution, and, at first glance, provides much the same as any other bank — banking services, fund management, project development, investment management, venture capital funds, private banking and financial consultancy and advisory services. Yet the similarities with commercial banks end there. Triodos’ entire share stock is lodged in a foundation, which then reissues depositary receipts for the public and other institutions, a device which protects the bank from being taken over — an important part of its philosophy owing to the very long-term view it takes of its investments and relationships. The bank’s philosophy is fundamentally one of a sustainable bank, promoting sustainability in all the areas it does business — socially and environmentally. Crucially it doesn’t do ‘inter-bank lending’ so it hasn’t been caught out by the current crisis. Instead, it has savings funds invested in green energy, provides credit and savings products to more than 152,000 small-scale entrepreneurs, and has made trade finance a large part of its activity in the Developing World.  

  Cash & Barter

There’s a whole economy beyond the reach of the banks, and it’s booming, according to recent research in Austria. 

The “shadow economy” — which includes untaxed trade in goods and services, such as cash-in-hand construction work or car repairs, but excludes serious crime such as illegal drugs and prostitution — is predicted to expand by 0.3% to 0.9% this year in 14 rich EU states, which are also members of the OECD. 

The highest growth in the sector — of 0.8% to 0.9% — is to come in Ireland, the UK and Spain, suggesting that cash payments to avoid tax rise quickly in the most recession-struck countries. Belgium, Austria and Germany meanwhile are at the lower end of the scale.  

The size of the shadow economy varies from region to region. In northern Europe and Scandinavia it represents between 10% and 18% of official GDP. In Mediterranean countries such as Portugal and Italy, the sector makes  up 20% to 25%. 

Many former communist EU countries have shadow sectors in the Mediterranean range. But in Estonia, Latvia, Romania and Bulgaria the estimate clocks in at 36% to 39%. 

The figures for EU neighbours can be much higher. In Belarus and Moldova, around half of economic activity bypasses the state; in Ukraine, about 57%; and in Georgia, 68%. 

Sponsor: W..P Carey