Community Loans are used to purchase or build community assets for the benefit of the community. The community owns the assets, and community members become custodians of a subset of the assets. For example, some local community members may decide to pool their resources to purchase and maintain the dwellings in which they live. Another community of businesses might decide to collectively own the shop and office space where they conduct their businesses. The community group (be it a company or a cooperative or a trust) becomes the assets owner. Individual members become the custodians of the space in which they work or in which they live.
The capital in community loans is not in the form of an asset but payment for future use of the asset. In all practical matters, the assets are treated as though the custodian (or the entity with the right to use the asset) is the asset owner. The only difference is that the custodian cannot sell the asset without the community's agreement. The custodian has complete control over the asset's use provided the uses fit within the community's rules.
Why Community Loans?
Why have community loans instead of having individual ownership or shareholder ownership in an organisation?
Individual ownership is expensive, as there are substantial costs associated with ownership changes.
- Group ownership reduces the cost of standard services.
- Community loans allow community enterprises to compete for funds on an equal footing to large national or multi-national companies.
- When a community receives money from a member the member receives more goods and services for the same amount of money or obtains a discount. Discounts reduce the amount of money paid to investors so saving the community money.
- All community members have the same incentive of operating investments at the lowest cost.
Individual ownership leads to rentier behaviour when parties who own the assets see them as a means of making money and not a place to live or work. Whether the group has individual ownership or shareholder ownership, the rentier problem arises, the cost of ownership is high, and the degree of cooperation is low.
Community loans provide custodians with an incentive to maintain the asset and to reduce the cost of operating the asset without the burden of ownership. Community Loans store capital as the future value of the asset's output not as asset ownership. They give investors fixed returns, and the assets' custodians take on the asset investment risk. The risk they take is that the future cost of using the assets may be higher than expected. In compensation for the risk, they may have lower future costs and fifty per cent of the money they pay to use the asset becomes future capital in the right to pay for the asset's use.
Community Loans cost less to operate as there is no need for the community to rent money. Instead of the loan giving an indirect return of interest, the return on investment comes directly from the profit made from the asset's use. Interest payments are unnecessary if the return is in more goods for the same amount of money.
Any community of independent entities can use the approach to remove the cost of interest. The interest savings last for (one divided by the interest rate) years. A $1 million loan at 4% converted to a community loan will save the community $40,000 a year for 25 years.
How the savings are divided is decided by the community. For example, investors in superannuation and other long-term savings could get half savings. The other half could go to the custodians (users) of the assets. The custodians acquire the capital as the right to future use of the asset output.
Pre Power One Cooperative
Pre Power One, a Canberra Cooperative, provides consumer-members with electricity from their roofs at 30% of the grid price. Members are asked to pay one month in advance. Investors receive 10% of their investment each year in monthly payments. The investment is adjusted for inflation, and the payments last for 20 years.
Community Loans are an Old Idea
Community loans use the same mechanism as governments use to create new money. Governments create money and guarantee its value by agreeing that community members can use the money to pay their future taxes. With Community loans, a community sells prepayments that they agree to accept for future goods and services. The difference with community loans is that a community use government money instead of creating their own community money.
When banks give loans the government allows them to create more government money and assure the government that the borrower will pay their taxes. Banks only give loans to people who have money or assets they can sell — such as their time.