Not a Novelty: Banks Operating Without Interest

Tired of paying interest on small loans? If you qualify for JAK bank of Sweden, you have reason to celebrate. They do not take interest!


By Grace Chan, PNYV! Singapore

One may wonder how a bank that operates without interest can prevail in this profit driven society. The idea of an interest-free banking model seems absurd, and to many, inconceivable. Even though many state regulators are still grappling on how to deal with this grey area of finance it works out just fine for a growing number of clients.  

The Swedish JAK Medlemsbank (Members� Bank) is a proven flourishing entity that it is possible to serve humanitarian needs and provide interest-free loans. It is perhaps the first bank in the world where members share the benefits of a viable, interest-free banking system that they themselves take responsibility for.  



The Swedish Bank was started in 1970 and it gained its banking license in 1997. Its name, JAK (Jord, Arbete and Kapital) means land, labour and capital, the hallmarks to economic growth. It is a cooperative association whereby its members dictate the policy and direction of the bank. The members vote for their board of directors at the annual meeting and elect four auditors, an ethical council, an election committee and working groups. The working dynamics of the bank is simple. It functions as a telephone bank, has 24 regional offices and has its headquarters in a little town called Sk�vde. There is no bias against rural members as the 24 offices are nicely spread out in the country.  

To date, the bank has achieved great success with approximately 30,000 members in 2005. It has trained volunteers who organize numerous lectures and exhibitions on sustainable development, ecological sustainability and ethical considerations, all in the hope to promote the system and to increase awareness amongst the people in Sweden. 

Such system of banking closely relates to Islamic banking and is becoming popular in today�s society. According to the Institute of Islamic Banking & Insurance, there are at least 250 Islamic financial institutions around the world, managing an estimated $200 billion.  

The Islamic community considers the paying or receiving interest as morally unacceptable. Interest-based systems work on the basis that depositors, the ones who normally have spare cash are attracted to earning more money with the given interest. The interest in turn is financed by the borrowers and frequently, amounts to more than the value of the initial loan. Thus, this process of transferring wealth from the poor to the rich, or from the rural to the prosperous areas is deemed socially undesirable in the Islamic faith and widely condemned by the Roman Catholic Church. After all, poor people taking small loans have a much higher record of paying back their debts than wealthy people taking large loans (compare the philosophy of the Grameen micro-financing system in India). In Islamic countries, it has always been like this, and now, the first Islamic bank has opened in London. But back to Sweden’s JAK Bank, which uses its own, unique model.    


How does it work? 

In the JAK system, large numbers result in strength. By pooling the resources of many people, it is easier for a person to raise an enormous sum of money. A person�s loan entitlement is calculated stringently based on �savings points�. For a new member, the first stage is to save money and earn savings points. Simply put, this means that each member who wishes to take out a loan must save money first and, and over a lifetime, save roughly enough money for the period as he will have borrowed.

The administration costs are the only fee that each member has to fork out while taking up the loan. The other costs would include 200 SEK for the entrance fee to JAK and 200 SEK per year as a membership fee.  


Low Risk and High Liquidity  

Such systems must ensure that there is little risk of defaults in loans. Fortunately, JAK�s system has several redeeming factors that allow a low default rate. JAK will assess the borrower on a few categories: loan size, duration based upon their desired loan amount, desired repayments, member�s income, expenses, age, gender and assessible savings points. These factors will enable the bank to evaluate the borrower�s capability to repay the loan with the aid of computer software. 

There is an average processing of 20-25 applications weekly, out of which 95% are approved. Most loans are secured, with a personal guarantor or against personal assets. Members are generally instilled with good behavior are unquestionably interested and involved in the concept that accentuates interest-free banking. Therefore, smattering loans end in default.   

Even so, there are practical issues pertaining to the liquidity of such a banking system: one, there are more borrowers than savers; two, there may be sudden withdrawals of savers. These concerns are dealt with as it is JAK�s policy to keep a minimum of 20% of pre-savings. In addition, stability is boosted when more saving points are given in long term deposit accounts. Moreover, JAK would induce saving for one�s retirement because of the following reasons: there would be no leakage in the pool of money as members of the bank are effectively borrowing from one another; the savings would not be subjected to speculative uncertainties and the system of borrowing would result in a lump sum payment once the loan is repaid due to after-savings. Alternatives for excessive demands for loans would be to put borrowers on a waiting list or refuse more loans.   



Although this form of banking is foreign to the masses, it sure is extricating and responsible. It caters to small borrowers, a form of banking that is absent in the current capitalist economy. It is a system where many cooperatives can emulate as it is depicted as an ethical model to engage lenders and borrowers to their beliefs and in an organization that benefits them all. It promotes community spirit, a huge contrast to the interest-based system, one that is filtrated with egocentricity and competitiveness. Somehow, one cannot help feeling significantly safer relying on one another as compared to relying on the volatile mainstream financial markets. 




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