Chapter 7
Stimulating Fiscal Vibrancy by Creating a New Economy—Brazil
PICTURE YOURSELF APPLYING FOR A LOAN TO BUY A HOUSE JUST A few streets away from where you work. The bank's loan officers investigate your credit history, so they know there is a good chance that you will be able to repay. Soon you will live in a new house close to your place of business. You won't have to commute every day, so you can sell your car and save money by doing so. You can buy everything you need: food, clothes, shoes, and medicines in the neighborhood. Your children can walk to the nearby school. You will end up spending most of your income in your new neighborhood and your neighbors will probably do the same. The local shops will prosper, the schools will hire more teachers, the food market will need to expand its business, and your bank and service industries will be there to support you and your neighbors while they turn a profit. Life is good.
Then picture yourself as part of an impoverished community, where most people do not have formal nine-to-five jobs. Because the community does not support many employment opportunities, when you do go to work, it's usually outside the community. Because the community is very poor, there's no reason for a bank to open an office—there isn't enough business to sustain it. Without a bank, you and your neighbors have no access to legal credit—you can't buy a house; you can't start businesses. There is no support for shops, schools, or markets. As a result, whatever money you have, you have no choice but to spend it elsewhere—outside the community. With not much being spent or sold in the area, no local economy is generated and the cycle of poverty perpetuates itself. You and the residents of your community remain underserved and poor. Life is not so good; in fact, it's pretty bleak.
In the 1970s, Brazil was under a severe dictatorship and any kind of political action was prohibited. A new movement called Liberation Theology, which connected Christian theology and political activism, was growing fast in Latin America and serving as a pathway for several priests to get engaged with underserved communities. Joaquim de Melo Neto was one of them. While he was training to become a priest, Joaquim started to work in very poor communities, ones which were completely out of the mainstream and forgotten by the government. It was then he decided that if he could find ways to help those communities access their rights so they could raise their standard of living and improve their situation, he would spend his life doing so.
When he moved to the Conjunto Palmeiras, a slum on the outskirts of Fortaleza (in northeast Brazil), Joaquim realized that the absence of any infrastructure in the area and the distressed economic conditions of the people would require more than just a small group of committed citizens fighting for their rights. He needed to gather and engage the support of the entire community to help them build the type of environment they wanted for themselves. He organized the slum into groups of local stakeholders: people affiliated with the churches, those active in the schools, the soccer clubs, the cultural groups. All of them came together to create an association, which had the responsibility of building a new neighborhood—more organized and integrated, designed with the needs of the residents in mind. Almost immediately, the association decided it needed to develop a community center to train local people on how to defend their own rights. The training led to the beginning of a new dialogue with the local government—one that would later support the implementation of public policies around sanitation, electricity use, and transportation in the slum, and would prove to benefit underserved communities all over Brazil.
However, after many long and hard years working to improve Conjunto Palmeiras, Joaquim started to notice that the poor economy and the lack of nearby jobs had families migrating away from the area. It was then he realized that to enable the community to flourish to the point where it could sustain itself, it needed not only a local infrastructure and improved conditions but also new opportunities for local people. A short time later, the idea of creating a “bank of and for the people”—to stimulate and facilitate the local economy—came into being.
Could Just Anyone Create a Bank?
In the late 1990s, Joaquim and the Neighborhood Association of Conjunto Palmeiras created the Banco Palmas (Palmas Bank), which was operated and managed entirely by community leaders as a people's bank. The bank's core philosophy involved a balance between production and consumption. Its purpose was to encourage and incentivize the growth of a network of producers and consumers inside the community so the residents could produce and purchase much of what they needed from each other, through their local initiatives. The people's bank developed a line of microcredit for those wishing to create or expand small businesses and another line of credit for those who wished to purchase products from the neighborhood. In this way the buying and selling of products from small merchants and producers within the community was facilitated, circulating incomes within the neighborhood and thereby promoting economic growth.
For the network to function, Joaquim had to establish alternative instruments and tools for local consumption (vouchers that would work like credit cards), alternative sales outlets (street fairs, farmers' markets, and small stores), and a specific code of conduct that encouraged residents to adopt a culture of cooperation. Producers were encouraged to form a “solidarity network,” where they all would agree to purchase from each other. The broom-maker would sell brooms to the neighborhood's tailor, who in turn sells dresses to the broom-maker. Obviously, the chain of products and transactions gets longer and more sophisticated as more and more residents participate in the exchanges.
The retail stores were also encouraged to purchase products that were produced in the community and offer them for sale to the local population, who would now be doing their shopping in the neighborhood stores. This dynamic created a virtuous circle where those who produce can sell; the more they sell the more jobs are created, the more residents are working, the more purchases are made. In the end, economic development outperforms poverty.
To make this cycle self-sustaining, Joaquim knew that he would have to find a way to guarantee income, as well as a way to keep that income in the community. The community-owned Palmas Bank decided to create its own currency, called “Palmas,” that would be recognized as money but that stayed within the community as an alternative for the official Brazilian currency. The Palmas money was quickly adopted, accepted, and recognized by local producers, merchants, and consumers. There was a huge effort to engage everyone in using Palmas, which started to circulate daily between the local shops and people, facilitating businesses, generating local wealth, creating solidarity and an alternative market among the families. As Joaquim explains: “This generated a great self-disciplining trust among the residents for a system that they themselves created.”
Joaquim insists that the entire conception of the Palmas Bank—from the initial strategies to the management of the resources—was carried out by the community itself. The first thing the community did was to map the local production and consumption in the neighborhood and survey the inputs used in production. The survey results identified the sites where producers and consumers were making their purchases and provided a clear picture of what needed to be produced, where, by whom, the resources available, and the resources needed. With this information, the community again got together to decide the operating model for the bank. For Joaquim, community management is the “wellspring of empowerment”—the place from which the community derives its nourishment so it can increase its capacity, develop its technical abilities, and grow its skills in negotiating with governments.
Palmas Bank was conceived as an integrated system, making loans for production and also lending to local consumers. It therefore helps stores find markets for products, it offers professional training in the strategy of solidarity economics, it develops incubators to reintegrate women into production, and it conducts a range of activities that support the production chain as a whole: including solidarity capital, sustainable production, fair trade, and ethical consumption. Joaquim believes that the poor can only have the opportunity for social inclusion and local development if all these aspects are addressed simultaneously.
When I first read about Joaquim's work, it was hard to understand how a person who was most interested in becoming a priest could create a new economy. It occurred to me that the work he did when he was studying to be a priest taught him about community organizing and how to understand the environment and the needs of the residents among whom he lived. He knew how to listen and how to empathize, and he built a financial institution based on those principles—created with, by, and for the people he was motivated to help.
Decentralize the Model, Develop a Movement
In the first few months of operation, Banco Palmas was able to prove its worth to the local community. But to succeed at a more substantial level, it had to expand its sphere of influence outside the community. It managed to do just that, and was becoming so successful that in its first year, the federal government, through the Central Bank of Brazil, began to get uncomfortable with the idea that Joaquim was creating a parallel system of currency that could have negative implications for the Brazilian economy. Slowly and patiently, Joaquim proved to the government that the Banco Palmas model was the best way to develop the depressed communities that existed throughout Brazil.
By using testimony of people whose lives and livelihoods were being changed by the bank, Joaquim convinced the government critics that he was not trying to replace the Brazilian currency; he was just developing good mechanisms to empower local communities to develop themselves. As Elias Lino—bank member, beneficiary, and changemaker—observes:
A community bank is one of the few ways in which the marginalized people like me can change or improve collectively. In other words, while the local and global economy provide few opportunities for the poor, organizations like Banco Palmas show that by creating the right environment, anyone can be included in changing their destiny.
Joaquim's arguments and examples were so effective that not long after, the Brazilian Central Bank created an official department to monitor the creation of other community banks and the spread of the Banco Palmas model in the country.
Six years after Banco Palmas was created, a second community bank came into being in the Brazilian state of Ceará. After that, many other local organizations created their own banks. Now, there are sixty-three “community development banks,” as they are called, in twelve states of Brazil. They all belong to a national network created to define and enhance the common work methods they use.
According to the Instituto de Pesquisa Econômica Aplicada, in January 2011, 39.5 percent of the Brazilian population did not have access to capital via a bank account. In the Northeast region of the country (where Banco Palmas is located) it is 52.6 percent. Traditional banks were never interested in opening branches in small and poor neighborhoods, so a partnership with a community development bank represented a great opportunity for forward-thinking banks and other institutions to step into a new line of business. As an example, Banco Popular do Brasil became a partner of the community banks as a guarantor of credit lines. At the same time, community banks became agents of Banco Popular do Brasil, allowing the communities to make and receive payments like pension benefits, operate checking and savings accounts, and enjoy other banking services. It became a win-win situation for everyone involved: the community, Banco Palmas, and Banco Popular do Brasil.
Banco Palmas was the first program that Joaquim created under his official organization, Instituto Palmas. Operating at the macro level, Instituto Palmas is responsible for gathering data about what the banks are doing and releasing publications about the outcome, the issues that affect the banks, and examples of solutions that some of the banks are implementing. This information supports the existing banks with important data and current trends and assists in the formation of new local banks. To sustain and grow the community bank concept while increasing its value to all its investors and partners, Instituto Palmas also provides a six-hundred-hour course to train local people across the country to negotiate and manage financial partnerships, develop new financial products and services, and disseminate the model. Recently, it partnered with three top universities in Brazil to help local communities create and implement their own banks.
All of Instituto Palmas's work is focused on propelling traditionally marginalized communities into fiscal vibrancy by supporting and encouraging economic growth. Joaquim is now playing a key role in developing an array of new financial products as well as technological services for the banks. A partnership with Zurich Financial Services developed a new line of insurance products; a partnership with Mahiti Infotech, a software firm in India (run by another Ashoka Fellow), is developing the “Free and Open Source Software Platform” for management of networks of community banks along with a mobile banking application. Indeed, keeping up with technologic advances is one of the most important challenges Instituto Palmas faces. In the meantime, Joaquim has identified many other opportunities and sees the work of Instituto Palmas expanding in the coming years—always in “true and open partnerships” with local communities and private and public institutions.
The Key to Financial Inclusion
Joaquim used to think that the financial system is something very distant and too complex for the poor. He himself couldn't understand how it worked. When he first understood the need to develop a local economy, he knew that he had to learn how this sector operated and try to demystify it to the poor. In these last years, he has realized that it is not as complicated as he thought. The hard part was to convince the banks and the government that poor people could also qualify for credit and be included financially. If this happened, then it was possible to change the dynamics of the existing economic scenario in slums and for slum dwellers. He just needed to create a financial and economic mechanism that made sense according to the reality of the community.
Traditional banks know that they have a long way to go in terms of learning how communities think and behave. Perhaps that's the reason that even institutions like regular banks now realize that if they really want to include everyone, they have to re-create their own operational systems. To do that, they are taking a serious look at the components of the community development banks that make them successful and profitable. For example, among other things, each community development bank is charged with stimulating the creation of local production and consumption and supporting all the businesses in the community. Most important, each is owned and managed by the community itself. Joaquim can already envision the impact on communities all over the world, if more traditional banks could incorporate some of these elements in their existing models, as did Banco Popular do Brasil. Since he firmly believes that financial inclusion is only possible when the poor are socially and productively included, he knows that is the key to success that banks can use to open their doors to everyone.