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Chapter 4 of "Short Circuit" - page 2
Tallow credit union lends 'quite a lot' to members to use in their businesses. "It would be more difficult if we were in a bigger town" Mrs Ryan says. "We know the seed and we know the breed and, if a family is honest, you can be fairly sure that the children will be too, although you do get the odd black sheep. In some cases, we would already know quite a lot about the project before it comes to us for a loan because it has been assessed by the Enterprise Group, although it's not necessary that it comes that way. We recently made loans of £12,500 each to two members so that they could establish a joint project. That total of £25,000 would be about as much as we would ever put into one venture. The risks are higher with this sort of loan so you need a balanced portfolio."
Mrs. Ryan thinks that the main problem with business loans from a credit union is their short term - by law they have to be repaid over five years in both Britain and Ireland. "I'm hoping that there will be a change in the legislation and we'll be able to lend for ten years, but I suspect it will increase to seven" she says. If she were managing a credit union in the UK she would almost certainly also complain about the £5,000 loan ceiling as well but in Ireland there is no limit on how big a loan to a member can be so long as it does not exceed 10% of the assets of the credit union concerned.
In 1994 when the Irish banks were paying their ordinary customers about 0.5% interest on their savings accounts and lending to small businesses at between 8% and 10.25% and to big business at 6.65%, Tallow, which was paying a dividend of 4%, half its surplus, had more savings on its hands than it could lend on to members at its 12.68% rate. However, like most credit union managers, Mrs. Ryan did not favour cutting her interest and dividend rates for fear that at some time they might have to be put up again. "That's one thing that people like about our loans - they know exactly what the interest rate will be in four years' time. They are about 1% more expensive than an overdraft now but during 1992 they were very much cheaper because the banks' rates went up to 20%." Would she favour reduced-rate loans for local businesses? "Definitely not. They would be against the rules anyway because all members have to be treated equally. In any case, the risk on business loans is higher than that for personal ones."
"Before we opened up in 1989, we thought we would be able to raise a total of perhaps £50,000 in large amounts from a few individuals" Mark Beeson, a TILT founder-director told me in 1994, when the amount under its control had risen to £6,000, the highest ever. "Unfortunately, however, deposits on that scale never materialised and, as a result, we've never been able to make individual loans of more than £750."
Click to read panel: Grameen lending methods successful in Chicago
Several years' thought and study went into TILT's establishment, however, and the fact that it survives and does a useful job despite its small size makes it a more useful model for communities elsewhere than an organisation which started big and experienced few problems. "Under the present system, money is inevitably drawn away from those areas which need it and loaned out in places which are already thriving" Beeson says. "We set up TILT because we realised that while people might be ready to set up small businesses and to trade on a local scale, buying from producers they knew who used methods of production which were environment- and community-friendly, their surpluses, their savings, would tend to stay in big institutions which might invest them in projects completely at variance with their depositors' ideologies and which could indeed undermine whatever those depositors were working for in their careers."
Although discussion of the need for a local bank began as early as 1981 in the first issue of The Dart, a bi-monthly community magazine which Beeson founded and edits, it was 1987 before Norman Duncan, a retired consultant to the oil industry, and Andy Langford, a founder of the Conker Shoe Company, one of the two co-operatively-run shoe manufacturing businesses in Totnes, began to plan to set one up.
"Originally, Andy and Norman thought that we could model TILT on investment funds in the US and New Zealand but it soon became clear that British law meant that the structure of any organisation here would have to be rather different" Beeson says. "So, in July 1987, they sent an outline of their idea, together with their CVs, to a number of organisations connected with alternative finance asking for advice and help. Most of the replies were discouraging because they pointed out that if we were to set up as a proper bank we would need at least £5m. in capital, an impressive board of directors and a three-year track record in lending before we could even apply for a licence from the Bank of England, which, even then, we would be most unlikely to get. The one positive idea came from Mercury Provident (now Triodos Bank), an ethical bank based in Sussex, which suggested that TILT should act as a broker for investors who wanted to put their money into various forms of community enterprise, which is more or less what Mercury does itself.
"A lot of attention was given to the form TILT should take. Andy and Norman investigated the possibility of setting up a charitable trust, only to find that TILT could not be registered as a charity because its activities were to be mainly concerned with assisting commercial operations, even though its objective in providing that assistance was to benefit the community and the environment. Another idea was to set it up as a Friendly Society or co-op, particularly as this would have given us the sort of democratic decision-making structures we wanted, and for a time it looked as though we would be taking that road. Indeed, at the meeting to launch the TILT Setting Up Association in February 1989, that was the plan outlined. The meeting raised £750 to cover fitting out the Community Office on the High Street in Totnes, from which TILT now operates, and to provide TILT's legal registration fees. A large number of people were interested in the project and there was a hard-core of five or six individuals who believed in directing their energies towards changing things at the local as opposed to the national level. I joined at the Setting-Up Association at its first meeting."
Two months later, however, a letter arrived from the Registrar of Friendly Societies to say that, under the Industrial and Provident Society acts, a co-op could not make investing on behalf of its members its main business. While this ruling was correct, had the Totnes group had access to specialist advice or had the Registrar gone out of his way to be more helpful, it would have been possible to have restructured the application and registered TILT under the Provident Society legislation. Instead, the project took another direction.
"By now, regular meetings of the Setting-Up Association were taking place and the letter seemed a great set-back" Beeson says. "However, Norman had discovered that an ordinary limited company carrying out investment business on behalf of its shareholders was exempted from having to register under the Financial Services Act of 1986 and could raise capital from those shareholders without having to register the issue or circulate a prospectus. This was a way out of the legal impasse, although it still meant that we became more hedged around with restrictions and limitations than we had hoped to be."
The most serious of these limitations was that TILT cannot advertise for, nor otherwise publicly solicit deposits, which as Beeson says, is 'a considerable handicap for a company with a yet unknown name'. Nevertheless, registration as a limited company and its licensing under the Consumer Credit Act went ahead and the organisation was launched on November 26th, 1989. Andy Langford had left Totnes by this time - he now lives in Oxford where he teaches permaculture design and helped establish the city's first LETS - and the founding directors were Beeson, Duncan, Prem Ash from Conker Shoes, Alison Hastie from Green Shoes, William Hubbard, a solicitor, and Amiten O'Keeffe, a builder. All except Duncan were still serving at the end of 1995.
Anyone borrowing from TILT or lending to it is required to hold a £10 membership share which enables them to help make policy and elect directors. Members are allowed to purchase an additional voting share for each year's membership up to a maximum of five on the basis that their knowledge of TILT, and their commitment to it, is likely to be greater than that of someone who has just joined but, so far, no-one has. Members wishing to invest can chose between buying ordinary TILT shares or making it a loan. The ordinary shares cost £100 each, carry no vote and entitle the holder to a dividend should TILT's profits ever become adequate for its board to declare one. "Members understand that we're not likely to become a vast profitmaking concern" Beeson comments.
Loan stock is issued each year at interest rates determined by the sum involved and the term for which it is lent. The rates also vary with the Bank of England's minimum lending rate (MLR). Thus, for example, someone depositing the minimum amount, £100, for the minimum period, six months, will receive MLR less 6%, while someone depositing over £5,000 (which no-one has done yet) for five years will get MLR minus 2.75% "At present we lend at 6.75% above MLR, which is a lot cheaper than a personal loan from the bank, even if such loans were available to our borrowers which is generally not the case" Beeson told me when MLR was 5.25%. "Loan stock holders get an average interest rate of 2-3% because most of their deposits are quite small and lent for short periods and our administrative costs are relatively high. TILT cannot be an easy source of cheap money because we can only survive if we balance our books. Any member can join the Loan Consideration Committee which selects projects on the basis of their potential contribution to the local area. However, only projects which give firm evidence of financial viability will be assisted and all lending is conditional on the borrower having guarantors."
Click for panel from original text on novel ways of raising small loans
Beeson admits that although TILT takes 'inordinate time and care' in vetting loan applications, one or two of the projects it has assisted have run into difficulties. "In such cases, we waive repayments for a month or two but we keep in touch with the businesses weekly, coaxing them along, and they have survived. Successful lending can't be done in isolation from the business and those behind it. We quite frequently help prospective borrowers in preparing their forecasts and sometimes our loans are conditional on borrowers accepting technical or managerial advice. The experience of similar funding systems abroad shows that close links between borrowers and lenders reduces defaults to almost zero."
TILT has only continued to operate because of a considerable amount of unpaid effort put into it by its directors. "We've helped four or five projects to continue and in some cases to flourish" Beeson says, "so we feel that we've achieved something. We're also the first organisation of its kind in Britain and have provided a model because I don't see why our system should not be repeated elsewhere." Nevertheless, he agrees that it would be better if TILT were bigger: "Then we could support a front person. At present, operating the company can weigh quite heavily on the directors' time."
In mid 1995, Beeson told me that be believed TILT would now expand steadily. "When something like this is established there is an enormous surge of support and enthusiasm. This dies away to be followed by a tough period in which you have to prove to potential investors that you are going to survive. We've just about got through that period now and more offers of deposits and applications for loans are coming in. We've just received a deposit of £2,500 for 4.5 years, our biggest and longest ever, which is a good sign. We need to have about £10,000 available to us and I hope we will get up to that figure in the next two years. At that level we would be able to break even and continue indefinitely. At present, after covering all our expenses although the directors get nothing for their time, we are making a loss of between £50 and £100 a year which is funded from our share capital. That is obviously not sustainable."
Beeson is not alone in thinking that the TILT model is applicable elsewhere. Andy Langford adopted it almost entirely when he set up Shared Visions Ltd. in 1994 to make small loans available to permaculture and sustainable agricultural projects throughout the UK. "Shared Visions differs from TILT in one crucial respect" Beeson says. "TILT's whole ethos is local and we see it moving up and down the local class and interest strata building community. Mercury Provident and Shared Visions are national. They move horizontally along national class and interest strata catering for special interest groups. Before Andy left TILT he had come to feel that it was not going to be sufficiently national for what he wanted to do in the permaculture movement."
Would TILT have developed differently if it had taken Mercury Provident's advice to follow its example? Well, its founders might have registered it as a provident society - 'a form of savings-club-cum-investment-fund devised .... in the last century for small depositors' as Mercury once put it in one of its brochures. All deposits in provident societies are legally share investments which, unlike normal limited company share capital, can be repaid if the society's liquidity allows. Anyone who invests in a provident society automatically becomes a shareholder and all their investment is at risk - there is no deposit insurance as with a bank - but societies have two classes of shares and the brunt of the risk is carried by the membership shares which carry no interest and of which members must buy a minimum amount. Interest - which is strictly a dividend, credit-union style - can only be paid on deposit shares, the second type. The fact the provident societies cannot pay interest on membership shares, their risk capital, probably circumscribes them more than the limited company which TILT became since TILT can offer the hope of future dividends to entice people to buy its equivalent.
Click for 2002 update on TILT by Caroline Whyte
Mercury itself ceased to be a provident society in 1986 because of the difficulty it was having in selling enough of the higher risk, zero-interest membership shares to its members at a time when its lending was growing rapidly to meet the highly confidential capital-to-loan ratio for deposit-takers specified by the Bank of England. Its solution was to become a public limited company and a fully-fledged bank, a route which would be closed to it and to similar bodies today. "We were able to do so only because we had been licensed as a deposit-taker - which essentially means a bank - just before the secondary banking crisis in the early seventies, as a result of which the regulations were tightened up a lot" Glen Saunders, a Mercury director, told me.
Mercury converted the provident society's membership shares into membership shares in the plc, keeping the 'one shareholder, one vote no matter how many shares they own, no dividends' principle enshrined in its new Memorandum and Articles of Association. The change meant it could issue ordinary shares for the first time. These, like the membership shares, count towards the risk capital required by the Bank of England but, unlike the former, carry no vote and purchasers can specify what rate of interest they wish to be paid within a certain range. The new shares have increased Mercury's risk capital but by barely enough to keep pace with the rapid growth of its loans which rose from £1m. in 1985 to £2m. by early 1988 and £4m. by the end of 1992. A deterrent for purchasers is that ordinary shares cannot be readily sold: Mercury undertakes to find a customer for them but warns that 'resale may take some time.'
To be approved for a loan by Mercury, a proposal not only has to be financially viable but also likely to produce a significant amount of what the bank calls 'added-value' for society and/or the environment. In some cases, the project's supporters are asked to provide personal guarantees to cover the loan if the venture proves unsuccessful. "The bank accepts normal forms of collateral but we prefer guarantees provided that they are spread thinly so that guarantors are not seriously affected in case of a bad debt" Saunders says.
Whereas TILT got its initial deposits and then looked for projects to which to lend them, Mercury has always done things the other way around, approving projects before attempting raise funds. This seems to have worked very well as the organisation has always had more deposits than it has had projects approved for loans: so much so, in fact, that at the end of 1992, £3.9m. was held in a variety of liquid financial assets, roughly £200,000 more than it had out on loan to its projects, a ratio which was in Saunders' view 'higher than desirable given our fundamental goals' and which the bank was working to reduce. Two factors had caused this situation - Mercury's rapid growth, since deposits can be taken in more quickly than they can be prudently lent out, and the need to keep large sums on hand in order to be able allow depositors, some of whom can request their money back with as little as one day's notice, to withdraw whenever they wish. "We are trying to educate our depositors to understand the consequences of short periods of notice where longer terms will allow us to use the money more effectively in terms of our and their real intentions" Saunders told me in 1994, predicting that an optimal liquidity ration would be achieved in a few months' time.
Depositors in Mercury are invited to 'target' their money by specifying the type of activity they would like it to be used in and the interest rate they would like to be paid. Mercury then adds its fixed service charge - typically 4% - to the interest rate the customer has specified and this is the amount the borrower will be charged. In mid-1994, depositors were invited to specify rates between zero and 2.5% and could deposit a minimum of £10 for as little as a week, with only a day's notice of withdrawal being required. Fixed term deposits did offer better interest rates, ranging from 2.5% on £500 deposited for one month to 5% on £50,000 for six months, but no targeting of loans was permitted. Deposits with Mercury are covered by the Bank of England's Deposit Protection Scheme just like other banks. This ensures that 75% of deposits up to £20,000 - that is, a maximum of £15,000 - will be refunded should the bank collapse.
Potential depositors target their savings using a list of projects which have already received their loans from untargetted funds or from funds for which the depositor had merely specified the sector. Thus, if someone says they would like to make a loan to, say, the Henry Doubleday Research Association or the Glasgow Steiner School, both of which were among the 110 projects on Mercury's Summer 1994 list, their money would be placed there and the untargetted funds released for use elsewhere. Of course, there is always a chance that well-known bodies will be offered too much money and Mercury warns that "we cannot always allocate your money exactly to the projects of your choice." If the project a depositor chooses runs into trouble, he or she will not suffer - any loss will be made up out of Mercury's reserves. "We've only had three bad debts in twenty years'" Saunders says. "The last one was for £75. Of course, more projects than that have ceased trading, but we've got our money back. People often perceive the sort of project we lend to as being risky but, in fact, they are more stable than commercial ventures as a rule."
Mercury was set up in 1974 with seven directors, all of whom had been influenced by the work of the Austrian philosopher Rudolf Steiner and were members of the Anthroposophical Society he founded. Only one had any experience in banking. The rest were an economic journalist, a junior business executive, a farmer, an accountant and two teachers. It got off to a slow start and it was 1976 before it processed its first loan - for a cowshed. "Then things began to come thick and fast" says Saunders. "They had to employ a secretary and the loan committee spent most of each Saturday morning meeting applicants and developing policy. However, there was still no office or telephone on which they could be reached. None of them received regular remuneration and they seldom charged fees for their time. But money came in fast enough: every loan for which they sought funds was oversubscribed."
Despite its success, Mercury was smaller than its directors would have liked. This led them to merged with a similar Dutch bank, Triodos, in mid 1995 and to take its name. "We cannot service the needs of many interesting social and environmental projects" Saunders told me some months before the merger. "Our maximum loan before we make what is known as a large exposure is £140,000 whereas a small social housing project will need at least £250,000. A satisfactory balance to the loan book in terms of risk, exposure, workload etc. has to be achieved by mixing the larger loans with the many smaller ones we take on."
Before the merger, Mercury was approached by several groups wanting to start similar, but locally-focused lending organisations. "We support the local circulation of funds, but with caveats" Saunders says. "There can be difficulties with too circumscribed a circulation area. Small local funds have difficulty generating the capital needed except for the very smallest types of enterprise and the liquidity of such funds is often highly restricted. The danger of local collapses of circulation is considerable. At present we are looking to see whether we can create something with and through Triodos - by, for example, local targeting - which will achieve the benefits of local circulation without these disadvantages."
Click for 2002 update on Triodos bank by Caroline Whyte
Because of the massive hurdles which have to be cleared before the Bank of England will permit registration as a bank, only one organisation in Britain or Ireland is currently attempting to establish itself as a fully-fledged, locally-oriented bank to foster community initiatives. This is the Aston Reinvestment Trust whose foundation was promoted by the Birmingham Settlement, a charity working for the regeneration of life and business in disadvantaged areas of Birmingham. "We've modelled our project on the community development loans funds in the US. There are now fifty of these and their loss rate is only around 1%" Pat Conaty, the project's development manager told me in late 1994. "We've set up two companies, Aston Reinvestment Assurance, an insurance company, and Aston Reinvestment Company, an investment company, and one underwrites the risks of the other. We are now trying to raise £3.5m. from churches, foundations and ethical investors. If we are successful and the investment company can establish a good track record, we hope to be licensed as a bank and be able to accept deposits from the public in three or four years." Six months later, enough seed money was in place for the Trust to be launched at the Bank of England premises in Birmingham with Joan Shapiro of the South Shore Bank (see panel) as keynote speaker.
Click for panel from original book on how a bank can transform a neighbourhood
Click for 2003 update on Aston Reinvestment Trust, and other Community Reinvestment Trusts in the UK, by Caroline Whyte
Against this, at least three other groups involved in ethical investment have recently decided not to attempt to become banks and have used the British Industrial and Provident Society acts - which are basically the same as those in Ireland - to become provident societies. The pioneer was Shared Interest in April 1990. This grew out of a wish by Traidcraft plc, the alternative trading organisation based in Newcastle, to set up an institution to lend largely to groups of producers in the Third World, although poor people anywhere would have been eligible. Traidcraft was already making loans to co-operatives and similar bodies overseas to help them produce the goods it sold through its catalogue.
Traidcraft's original plan was to persuade one of the high street banks to offer special ethical deposit accounts which would place 75% of the investments they took in with the new fund and 25% on the money markets in order to maintain liquidity. Four banks considered the proposal but eventually turned it down as they felt they would have to remain entirely responsible for whatever happened to their customers' money. The possibility of raising capital by selling shares in an investment company was also explored but rejected since no-one was confident that an adequate amount would be subscribed within forty days after the publication of the prospectus, the maximum period the law allowed. Then Chris Ruck, a former chief executive of the Co-operative Bank suggested forming an Industrial and Provident Society, since shares could be sold without issuing a prospectus.
This course was adopted. The legal work involved was carried out by a Leeds solicitor, Malcolm Lynch, who was later involved in two similar formations, one of which was Radical Routes Ltd., a Birmingham-based co-op of co-operatives which by mid 1994 had raised over £100,000 from investors to provide its member co-ops with loans they found impossible to obtain from the banks. (Click for 2003 update). The other was ICOF Community Capital, launched in 1994 by Industrial Common Ownership Finance Ltd (ICOF), to provide loans for community enterprises. ICOF, a not-for-profit company limited by guarantee, had itself been set up twenty-one years earlier to provide funds for workers' co-operatives and, like Mercury, found that too few people were prepared to buy zero-interest membership shares to allow it to expand. To get around this problem it launched a public limited company, ICOF plc, in 1987 which was able to raise £560,000 by the sale of non-voting preference shares. But the costs of this issue were high - £50,000 - and because the shares have to be repaid in 1997, ICOF is already having to set aside funds reducing the amount it can lend. As a result of this experience, it decided not to take the plc road again.
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