I’ve been reading Bernard Lietaer’s amazing book “The Future of Money” which has opened my eyes to some very interesting alternative ways to look at the economy. I’ve been interested in alternative currencies for some time, but he makes a very convincing case for them and gives some very practical guidance for how to structure them to make them succeed.
Microfinance has struggled with rural agricultural loans for many years. Loans to farmers have a very high development impact as they enable farmers to buy better quality seeds, fertilizer or pesticide. However farmers cashflows are exactly the opposite of what you want for a traditional MFI loan as farmers have regular small expenses (while the crops grow), with occasional large ones (when they need the loans) but their income is extremely lumpy – a situation further stressed by the concentration risk that lending to farmers brings as a drought hits all farmers equally, and thus defaults are highly correlated.
The ideal cashflow for an MFI loan is exactly the opposite of this: you want single, focused expenses followed by a regular cashflow stream. Of course few micro-entrepreneurs cashflows look like this as most are extremely volatile which is one of the reasons MFI loans don’t have the impact you might hope for*.
Reading Lietaer’s book I was struck with an alternative: what about a complementary currency backed by the farmers future production? Farmers could pay their laborers with an IOU redeemable at harvest time – saving their limited financial resources for the high value inputs. These IOU’s could then be traded by the laborers in local towns injecting money into the local ecosystem which would create new economic opportunities for trade. The farmers increase in yield would allow these IOU’s to be issued at a discount, say of 15%, which would reduce closer to harvest time providing a high saving rate to anyone who holds onto the scrips and a low borrowing rate for the farmer. Furthermore local people would be insulated from rising food prices as they would be paid at the rate when the scrip was issued
We would need to put a few things into place to make this work:
- The community would need to publically share overall debit balances to ensure farmers didn’t issue more credits than would be redeemable at harvest time – a web enabled computer or smartphone could do this job
- There would need to be a simple way for people to exchange credits – perhaps this could be done by SMS or with shared smartphones
- Would require community leadership to stand behind the currency and encourage businesses and services to accept the script
*Real micro-entrepreneurs cashflows are well explained by “Portfolio’s of the Poor” which demonstrates how what the poor really need are much more flexible products which combine savings and loans into single products, being closer to a currant account with overdraft facility than unsecured loan. Lack of technology infrastructure and customer financial education has inhibited development of flexible products like this to date, however new mobile technologies may be changing this.
