How Community Banks Outcompete Shareholder Banks

Kevin Cox
3 min readDec 3, 2023
Figure 1 — Showing varied sharing at a fixed interest rate of 6%

Shareholder banks are vulnerable to community banks as they keep all the profits from the loans and do not share them with their borrowers or lenders. Shareholder banks profit by creating loans to transfer houses and other long-lasting assets.

Community Banks are different as their business is to provide a service to their depositors and borrowers. Their mission is to give their depositors higher returns and their borrowers lower interest rates when transferring assets. They can do this by changing the rules on repayment of loans to share some of the interest.

Assume a home buyer has a mortgage of $300,000, an interest rate of 6% and ten years to repay the loan.

Figure 1 above shows how varying the sharing reduces the cost to the borrower while leaving the interest paid to the lender about the same. Figure 2 shows how varying the interest rates increases the lender's profit while barely changing the payments paid by the borrower.

Figure 1 — Showing varied interest rates at a fixed borrower share of 75%

Sharing Profits Reduces Borrower Costs and Increases Lender Returns

Sharing profits and varying interest rates allows loans to be tuned to reflect lenders' and borrowers' risks and costs. Traditional loans give all the profits to the lenders, but — particularly with bank loans where the bank creates fiat money under license from the government - the risks and costs of borrowers are much more significant than those of the lender.

The longer the loans and higher the interest rates, the greater the disparity. For infrastructure, the sharing, interest and cost of construction should result in yearly payments to cover maintenance and operating costs of the infrastructure.

Typically, this will result in ongoing costs of a small percentage interest on the Capital. This releases Capital for further investment in other infrastructure.

How a Book-keeping Change Benefits both Borrowers and Lenders

At first sight, it appears impossible for a change in bookkeeping to benefit both Borrowers and Lenders. The question is, who loses?

Bank shareholders lose because without sharing, all the profits go to them. The profits accumulate in the Bank, and some stay in the Bank as capital gains, and some are distributed later as dividends.

With sharing, these extra profits are distributed immediately to borrowers and depositors. Community Banks and Credit Unions can do this immediately; the difference is significant, as seen above. It means Community Banks have a competitive advantage over their shareholder competitors. This is increased if the Community organises itself into Permanent Local Housing Markets.

Banks have a license from the government to create new money. They do it by issuing loans and putting new money into a borrower’s bank account. The borrower has to work hard to make a profit and pay the money back. They also have to pay interest to cover the bank's costs and give the banks a profit. Banks have few costs as they have to have some money in reserve — which they leave in other banks or with the government and on which they collect interest. The other main cost is the risk of the loan not being repaid, in which case they sell the collateral.

A competent bank should keep most of the interest as profit to be given to shareholders.

A community bank does not have profit-sharing shareholders, and it shares some of the profits by giving some back to borrowers by taking some of the interest payments off the amount owed. It can increase the interest to depositors because the interest sharing to borrowers reduces the interest cost, some of which can be passed on to depositors. A 75% share of a higher interest will benefit depositors and borrowers while leaving the profit to the bank about the same. Sharing reduces the cost of interest to borrowers by about 1/3.

This book-keeping change will take at least 25% off the cost of Housing Loans, reducing, in turn, inflation. Community Banks could introduce this “overnight” as a soft change to benefit borrowers and depositors.

A further 25% or more reduction can be achieved by communities working together to create Permanent Local Money Markets.



Kevin Cox

Kevin works on empowering individuals within local communities to rid the economy of unearned income.