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Chapter 4 of "Short Circuit" - page 4

The other advantage the co-ops get from their association is first-rate advice and guidance on whatever they wish to do from the bank's consultancy division. This covers marketing, exporting, production techniques, industrial buildings, personnel, legal affairs, audit and management control systems. In extreme circumstances, however, the bank does not limit itself to merely giving advice and in the depressed period in Spain in the early 1980s, when the Mondragon co-ops collectively made a loss for three years running, it intervened extensively, sacking managers, changing product lines, trimming wage levels, merging member co-ops or transferring workers between them and, when it was finally satisfied, making concessionary loans. In 1983 alone, 34 out of the 100 co-ops underwent this sort of treatment which was highly successful: indeed in its entire history, only three Mondragon co-ops have ever closed, two because of special circumstances. Conventional firms in the Basque region have not survived so well and between 1975 and 1983 the area lost a fifth of its manufacturing jobs.

The new bank was successful in attracting private savings from the start and by 1966 was operating 21,653 accounts. "Libreta o maleta" was Fr. Arizmendiarrieta's slogan, bankbook or suitcase, save or emigrate. By 1987, the bank had 600,000 depositors, $3bn. in assets and was the 13th largest savings bank in Spain. In its early days, however, most of its funds came from the co-ops, particularly Ulgor, and 75% of its loans went back to other co-ops in the group to fund their expansion. Indeed, the bank's rules initially prevented it lending money except to its member co-ops.

The way in which the bank operates can best be shown by describing the role it plays in the establishment of a new co-op. If a group approaches the bank with an idea of its own or one selected from a list of possible projects the bank maintains, it will pay the salary of the member of the group most likely to become factory manager to work on a feasibility study in conjunction with members of the bank staff, including a 'godfather' whose responsibility it is to see the project through its early days. If the study shows the project is promising, the bank will loan 60% of the required capital. Half of the rest is covered by a low-cost (3%) long-term (10 years) loan from the Spanish government and the final 20% has to be found by the members of the group themselves. 70% of any losses the project makes in its first two years are converted into an additional loan by the bank to be repaid over the following seven years. The godfather gets a seat on the new co-op's board.

The big advantage of this approach for the bank is that each feasibility study it carries out builds up its expertise and provides information and ideas which may be useful for future feasibility studies. The advantage for the new co-operators is that they get help and guidance from a team which has handled previous start-ups and ought, therefore, to be able to save them making costly mistakes. Indeed, one estimate suggests that the value of the services provided by the bank to a new co-op is roughly equivalent to the amount of capital it lends. This way of doing things is certainly a far cry from that in Britain and Ireland where most small business start-ups are attempted by people who have never opened or run their own business before. In fact, some people with start-up experience are actively discriminated against because, if their start-up failed, they are likely to be refused a loan on the grounds of their 'bad track record'. It is therefore scarcely surprising that, according to Barclays Bank figures, only 40% of start-ups are still trading after their first three years.

As the Mondragon bank is actively involved in the management of its co-ops and shares risks with the people working in them and since the interest rates it charges co-ops have, at least in the past, been largely independent of those on the Madrid money market and capable of adjustment to a co-op's circumstances, they  are better seen as a combination of payment for services rendered and a share in the co-ops' profits, rather than pure interest as normally understood. Interest rates represent a financial performance target for a Mondragon co-op not an absolute obligation to pay as there is no question of the bank forcing it into liquidation if it is unable to do so. Instead, the ailing co-op is likely to be re-organised and, if necessary, re-financed, thus sharing the financial pain between the bank and the worker-co-operators. The Mondragon system is therefore reasonably - if messily - close to the risk-sharing, profit-sharing, no-interest ideal, although as the concept of interest is still omnipresent, a Muslim might not be happy with it. The individual co-ops are, effectively, interest-free too as the rate of interest they pay to their worker-members for the use of the capital they provide on joining and contribute from their share of the profits is flexible and depends on the co-op's performance in any given year: it is thus more akin to a dividend. The only guarantee that the co-op gives to its members about their capital is that its value will be increased each year in line with the cost of living and, as this is a group of people giving a guarantee to themselves, they will have to find the resources themselves, perhaps by taking lower wages, if their co-op makes inadequate profits for the promise to be kept.

Going Dutch keeps Insurance Payments Local (Click for panel from original book)

An equally valuable feature of the Mondragon system is that as its investors are also its workers and members of the local community, they are not solely interested in the financial return they get on their capital but the whole range of social and economic benefits a project generates. This has enabled it to avoid the acute conflict between the interests of investors and those of the community we discussed in an earlier chapter. As a result, Lankide Aurrezkia represents the best working model for a community enterprise loan fund we've got despite the fact that the Mondragon experiment is now heading the wrong way, as we will see in the final chapter.

Click for panel from original book on building societies

How, then, should a community should set out to build its own local banking system? Its first step is obviously the establishment of a credit union if it has not got one already. The primary purpose of this would be to enable people to borrow to purchase consumer goods or to undertake house repairs without causing a leakage of interest payments and service charges to the outside world.. The only decision the community needs to make before setting it up is whether it should charge interest or whether it should be part of JAK and interest-free. My personal view is that since most of the things - the freezers and greenhouses for example - members would buy with their loans would provide benefits year after year, it is entirely right that they should pay for these benefits in addition to repaying the loan. As far as I am concerned, interest payments are acceptable so long as they stay in the community: it is only with business investments that problems arise.

Once a credit union is running well and the directors feel they can take a further step without jeopardising it, they could start a Dutch-style insurance club or open a building society to provide a home for the deposits which, at present, they cannot lend to members and have to send out of the community for investment elsewhere. But although Irish credit unions and JAK banks can rent out workspace to community businesses as in Tallow, they should not attempt to provide business loans. This is because the banking model is totally inappropriate for financing local enterprises since it basically involves telling the borrower: "You know your business - or, at least, you ought to be pretending to if you want a loan. In any case, it is not our job to give advice. If you want that, hire a consultant. We daren’t risk even suggesting what you should do because if things turn out badly, we could be held legally responsible or the loan agreement could be cancelled by a court. What we want from you just that we get our interest and capital payments on time, however high the markets push up rates and whatever happens to the world or the national economy. And just remember, if you fall behind badly, we’ll seize the collateral you’ve signed over today and take up the personal guarantees." The fact is, you just can’t talk to a neighbour like that. If he or she is going to use a community’s savings in a business, the community has to be as sure as it can be that the enterprise is well thought out and has the necessary human resources behind it. Nor can it simply limit its involvement to a pre-investment investigation. Even TILT, operating on its tiny scale, finds that it has to help and advise its clients regularly if it is to protect its capital despite having investigated their projects thoroughly before it became involved. And, if things go really wrong, it needs the legal right to step in to help sort out the mess, Mondragon-style. Appointing a receiver is not the answer since their primary role is to recover the debt owed to the institution which appoints them rather than re-organising the operation to keep it open. In any case, they are usually sent in far too late.

Every community therefore needs an enterprise investment fund which has a team of people of sufficient calibre to investigate and then help manage the businesses in which it puts its money, and assembling such a team should be given higher priority than finding the capital to invest. These funds should see themselves as holding companies which share the management, the profits and the losses with the groups and individuals with whom they work rather than lending organisations which stand back from a project's problems, insist on a fixed rate of interest and threaten to call in their collateral and wind up the operation unless it is paid. Where they should differ from conventional holding companes, however, is in looking for social dividend as well as a financial return. Only when there are many such bodies about which people feel confident enough to invest their pension funds will we be able to feel happy that more self-reliant local economies are genuinely beginning to re-emerge.

Further Information (last updated September 2002):


In Ireland the national organisation is the Irish League of Credit Unions, 33-41 Lower Mount Street, Dublin 12, tel. +353 (0)1 6146700. For those in Northern Ireland who would prefer not to be affiliated with any organisation with headquarters in the Republic, there is the Ulster Federation of Credit Unions, 56, Sandy Row, Belfast BT12, tel +44 028902 236301.

The British equivalent is the Association of British Credit Unions Ltd., (ABCUL), Unit 307, Westminster Business Square, 339, Kennington Lane, London, SE11 5QY. Tel. 0171 582 2626. ABCUL has a series of downloadble PDF files containing detailed information about setting up a credit union at this link.


Triodos Bank, Brunel House, 11, The Promenade, Clifton, Bristol BS8 3NN. Tel. +44 0117 973 9339, fax +44 0117 973 9303, e-mail,

Aston Reinvestment Trust is the trading name of ART SHARE (Social Help Association for Reinvesting in Enterprise) Ltd. The address for ART SHARE Ltd. is The Rectory, 3 Tower Street, Birmingham B193UY. Tel +44 0121 3592444, fax +44 0121 3592333, e-mail

ICOF Ltd., 227c City Road, London EC1V 1JT. Tel +44 020 7251 6181, fax +44 020 7336 7407, e-mail

Fazlun Khalid, Islamic Foundation for Ecology and Environmental Sciences, 93 Court Road, Balsall Heath, Birmingham, B12 9LQ . Tel/fax 0181 904 3898.

UK Social Investment Forum, Holywell Centre, 1 Phipp Street, London EC2A 4PS. Tel. +44 020 7749 4880, fax +44 020 7749 4881, e-mail

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Footnotes for Chapter 4

Short Circuit by Richard Douthwaite: links within this site

Search Contents Foreword Preface Introduction
Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7
Epilogue 2002/3 Updates Links Site Map