The Jak Banking Model

For Greens the central change needed in the economic sphere is an end to the growth that is driving us to over-exploit the planet’s resources. It is generally agreed that the need for growth is a consequence of the payment of interest on money. This leads to a constant expansion of money, which needs to be matched by a constant expansion in physical economic activity. If we look around the world never has the need for a steady state economy been clearer.

At a more personal level millions of people in Britain have come to understand the meaning of the small print: investments can go up as well as down. For many, money they invested a few years ago has been cut in half because of falls in the value of stocks and shares. They see the money they have saved for retirement removed by some unwelcome invisible hand of the financial market. Millions more find that their endowments will not cover the cost of their mortgage, leaving them debtors well into what they hoped would be a carefree retirement. Interest or not, never has the investment market seemed more threatening.

From Sweden, that utopian source of solutions to so many of our social and economic problems, comes an approach to banking that wraps up both these dilemmas: interest-free banking that offers financial security while being internally balanced and so not requiring to trespass on the planet’s resources.

JAK bank represents a mutual approach to the need to borrow money that is reminiscent of the early building societies and to savings schemes that people in poor communities continue to use to this day, whether we think of the Tontines of West Africa or Christmas clubs in the poorer areas of the UK. All these systems rely on the principle that there is strength in numbers. One person may never be able to afford to raise the capital to buy a house or even a car, but by pooling their resources they can ensure that each person can raise such a large lump sum in turn. These schemes have the enormous advantage that no money is lost from the system. In contrast, interest-based systems rely on the lure of a certain percentage per year to attract depositors, who are people who have spare money. This interest must be paid by the borrowers, and often amounts to more than the value of the initial loan. Hence, any interest-based system results in the transfer of resources from poor to rich; this is the reason that, until about 400 years ago, Christians considered the charging of interest morally unacceptable, a position still officially held by the Islamic community.

In the JAK system saving and borrowing is seen as a way of balancing your needs across your own life, with support from other members. This is illustrated in the figure, which centres around a single person’s lifetime income generation, illustrated as a U-shaped curve. As a child you are below the self-sufficiency line, reliant on others’ earnings, and you return to this state in old age. During the middle phase, when you are healthy and productive, you have more income than you need and this needs to be saved for later use. In the JAK system the other curves become important too, since these represent people at other stages of their lives who can supplement your income, and whose income you supplement during your middle years.

This is where the scheme begins to relate to the modified version of such a savings scheme could be used as a response to the current pensions crisis. The plea by the government for us to invest our earnings for our future needs is based on just such an understanding of life-cycle earnings. The problem is that we have learned to our cost the insecurity of investing in the interest-driven investment market. As well as our well-founded fears of losing a significant portion of our hard-earned cash, we also feel it is wrong that our very basic needs can be subject to fluctuations in the global casino the international financial market has become. There is no surprise that people are ignoring the threats and entreaties and spending their money while they have the chance.

A savings bank without interest but with after-savings building up a nest-egg for retirement, JAK bank would make saving for one’s retirement considerably more attractive for three main reasons: there are would be no leakages of value from the system to shareholders; savings are would not be invested in the international market and hence subject to speculative fluctuations; the system of borrowing results would result in a lump sum payment once the loan is repaid because of a clever system of after-saving. It is the after-savings that keep the system in balance and remove the need to use interest to attract depositors. Members of the bank are effectively borrowing each other’s money. Those who have a need first borrow first but they must ensure that there is money in the fund to meet others’ needs to borrow by paying back extra money as they pay back their loan. Without these after-savings the fund would very soon find itself over-extended and have to refuse future loans.

The table gives a comparison of banking costs under the JAK system and under a conventional banking model with an average interest rate of 7 per cent. The figures are based on a loan of £200,000 over 30 years. This is larger than most loans actually made in the JAK bank, which tend to be smaller than this. But in principle, once the bank had been running for long enough for sufficient savings to be built up, combining a mortgage arrangement and a pension arrangement could be possible. The problem in the UK is not the lack of money for savings but the fact that it has all accumulated in the hands of those who have no present need for it.

Borrowing from JAK bank is not free: a fee of one-third the value of the loan is charged to cover bad risks and administration costs (3.5 % + 1 % x years to repay the loan). Once this cost is added to the after-savings the monthly cost of the loan is only slightly less than the cost with a conventional bank. The real difference comes at the end of the term, when the JAK borrower receives a lump-sum equivalent to the value of the loan. In a practical example a person might have paid off her student loan and then have an equivalent amount of value to use as a house deposit. This value is approximately the same as the quantity of money that, under a conventional banking system, she would have paid to the banks and its investors as interest. We could theoretically extend this so that a house loan generated enough after-savings over the period of the loan to provide income in old age.

Basic to any mutual loan system is the need to save before you can borrow and in the JAK system this is began by being organised by according to a complex system of points, to ensure that there were sufficient funds in the bank. You can then borrow only a maximum of sixteen times the number of savings points you have accumulated. The borrowing limit was sixteen times the number of accumulated savings points. However, such large amounts of money are now with the bank that this requirement is being abolished. However the balance between prior savings and after-savings will continue. The more you save before you borrow the less you need to contribute in after-savings. The system in Sweden is frequently used by students for paying their fees. If they face a problem with accumulating savings points these can be contributed by grandparents or a group of family members and friends. Such a group could also transfer savings points to support the borrowing of money by a young couple with children. In this way the savings system itself encourages a feeling of self-help and community spirit, in direct contrast to the bad feelings and competitive ethos generated by the interest-based banking system.

Thinking about banking in this way is liberating. After recovering from the initial disorientation of imagining a world without interest, you begin to see that relying on one another feels considerably safer than relying on the international money system. You also begin to see how the system of interest itself creates the insecurity of that system as surely as it is driving the planet towards destruction.