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Research - Solutions and Alternatives
Zero Percent Interest Banking - Adam Karbani
Interest based - banking is so prevalent in our society that
it seems to be a normal, effective, and simple way to run a financial
system. However, interest is a financial tool, which generally
creates a wider gap between the rich and the poor. This is because
the rich lend money to the poor in a system, which is advantageous
to the lender. The lender receives money plus interest whereas
the borrower often has difficulty in keeping up with the interest
payments on the original capital borrowed. Consequently, the main
problem with interest is that it is a perpetual system where it
is difficult for the borrower to pay down the original capital
because the interest keeps on increasing. For instance, many studies
and surveys have shown the high levels of credit card debt among
North Americans. This is largely due to an individual making the
minimum payment rather than paying off the debt as soon as possible.
However, the more interest accumulates when there is a larger
debt. However, the greatest effects of interest based financial
systems are seen in Africa. Some facts:
The countries of sub-Saharan Africa spend more each year repaying
debt than on all primary education and health care. - Jubilee
2000/USA http://www.churchworldservice.org/FactsHaveFaces/africafact.html
23 African countries are getting debt relief through the Highly
Indebted Poor Countries (HIPC) program. This means they have an
extra billion dollars a year to spend fighting poverty - but each
year they still have to repay $1.7 billion on old debts. (IMF)
http://www.data.org/whyafrica/checkthefacts/
In 1980, the total debt stock of South countries stood at US$567
billion. Since then, US$3,450 billion has been repaid in interest
and principal -- six times the 1980 level. Nonetheless, Third
World debt currently stands at US$2,070 billion.
http://www.africa.upenn.edu/Urgent_Action/apic-071401b.html
Interest also does not contribute in any real way to the society
as it is an intangible transaction. For instance, every dollar
spent on interest (an intangible product) is a dollar not spent
on tangible goods or services, such as health care, food, or education.
Furthermore, since almost all governments and businesses are paying
debt, this represents a higher cost of goods and services.
An alternative to the current system is an imperative for the
social justice movement. One alternative has been created by JAK
bank in Sweden. The CEO of JAK's states that "interest causes
unemployment, inflation, and environmental destruction."
The bank is a cooperative owned by its members and does not charge
interest on loans. JAK's earns money by charging an administrative
fee for loans and annual membership fees. However, the loan fee
seems to still be a lesser form of interest by being at a much
lesser rate as well as decreasing over time.
Example 1 - Traditional Bank:
A borrower borrows $10 000 at a rate of 10% per year. The borrower
wants to pay the debt off as
quickly as possibly but is only able to pay $2000 per year. The
time value of money is ignored.
Year 1 - Owes $11 000 ($10 000 x 1.10) - Pays $2 000 - New Balance
$9 000
Year 2 - Owes $9 900 ($9 000 x 1.10) - Pays $2 000 - New Balance
$7 900
Year 3 - Owes $8 690 ($7 900 x 1.10) - Pays $2 000 - New Balance
$5 900
Year 4 - Owes $6 490 ($5 900 x 1.10) - Pays $2 000 - New Balance
$4 490
Year 5 - Owes $4 939 ($4 490 x 1.10) - Pays $2 000 - New Balance
$2 939
Year 6 - Owes $3 233 ($2 939 x 1.10) - Pays $2 000 - New Balance
$1 233
Year 7 - Owes $1 356 ($1 233 x 1.10) - Pays $1 356 - Balance Paid
Off
From this example, we see that the borrower has to pay a total
of $13 356, not $11 000 ($10 000 x 10%), because interest is compounded
(calculated on the remaining balance at the end of each year).
Also, the lender has paid the capital off in five years but the
interest payments cause the balance to be paid off in over six
years. The lender makes $3 356, a 33% return, over a seven year
period.
Example 2 - JAK Bank:
Same situation as Example 1:
Year 1 - Owes $10 355 ($355 Loan Fee) - Pays $2 000 - New Balance
$8 355
Year 2 - Owes $8 651 ($296 Loan Fee) - Pays $2 000 - New Balance
$6 651
Year 3 - Owes $6 886 ($235 Loan Fee) - Pays $2 000 - New Balance
$4 886
Year 4 - Owes $5 058 ($172 Loan Fee) - Pays $2 000 - New Balance
$3 038
Year 5 - Owes $3 145 ($107 Loan Fee) - Pays $2 000 - New Balance
$1 145
Year 6 - Owes $1 185 ($40 Loan Fee) - Pays $1 185 - Balance Paid
Off
This example differs from example 1 as it takes a shorter time
to pay off and the total amount paid is $11 185 compared to $13
356 in example 1.
Islamic banking operates on the premise of zero-interest banking.
Therefore, much of the current literature on the subject comes
from Muslims. In classic Islamic banking, business loans are treated
as a joint venture partnership between the lender and the borrower.
Therefore, no gains are made on the capital lent unless there
is a profit. However, in non-profit ventures such as housing and
schools, there is a need to create some incentive for a lender,
such as an hourly fee for administering the loan.
Example 3 - Theoretical Hourly Fee Bank:
Same situation as Examples 1 and 2 but the lender charges an hourly
administrative fee (like lawyers, accountants).
Year 1 - Owes $10 000 - Pays $2 000 - New Balance $8 000
Year 2 - Owes $8 000 - Pays $2 000 - New Balance $6 000
Year 3 - Owes $6 000 - Pays $2 000 - New Balance $4 000
Year 4 - Owes $4 000 - Pays $2 000 - New Balance $2 000
Year 5 - Owes $2 000 - Pays $2 000 - Balance Paid Off
Total Fee - $500 ($100 per year at hourly rate of $50)
Another non-profit venture (eg. Housing) solution has been created
by the Ansar Cooperative Housing Corporation (ACHC) in Ontario.
Essentially, the system works by an individual becoming a member
by paying a membership fee as well as buying six shares of the
Coop. Membership is contingent on buying 6 shares each year. Once
a member has enough shares, they may be approved for a housing
loan.
Example 4 - ACHC Housing Financing:
Under the ACHC plan, an individual must have shares equivalent
to at least 20% of the first $100 000 of the house's cost and
40% of the difference between $100 000 - $200 000. In our example,
an individual wants a loan for a $200 000 house. Consequently,
the individual must have $60 000 in co-op shares. The remaining
$140 000 is paid through an agreed upon rental rate. However,
the rental rate is based on market rates which may result in a
total in excess of $140 000. This excess would be considered to
ACHC's profit. Also, ACHC may earn profits by investing the money
raised from shares in for-profit businesses.
Ultimately, the shift to a zero-interest banking system is a
dramatic one. However, it is needed in order to address the growing
global socio-economic inequalities. On the micro level, individuals
will benefit by enjoying lower costs of goods, housing, and services
as interest represents a high hidden cost. At the macro level,
nations will be able to spend money of much needed services rather
than servicing debt. The most viable solution at the micro level
is the establishment of diversified financial companies, which
operate on zero-interest principles and where profit and risk
are shared proportionately. One company that is pursuing this
strategy is Ittihad Capital in Calgary (www.ittihadcapital.com).
At the macro level, the global community should forgive or restructure
Africa's debt on fairer terms. As well, there should be regulations
regarding how much debt nations can accumulate.
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