Showing posts with label payday loans. Show all posts
Showing posts with label payday loans. Show all posts

Sunday, 15 December 2013

Seedbombing: Applying the Principles of Permaculture to Finance



I originally wrote this article for Transition Free Press Edition 4. It's published under a Creative Commons licence (see side panel for details)


Finance, even in its most high-tech formulations, is rooted in ecological systems. A high-frequency trading hedge fund, for example, relies on electricity created by burning fossillised organic matter. It relies on employees, surviving via agricultural systems. It trades in company shares, given value by the actions of those companies’ employees using assets (like computers and telecommunications systems) that are all dependent (at some level) on mining, forestry, and other extractive industries.

The financial system has been a net drain on ecological systems though. Finance involves steering economic energy – symbolised in money – in an attempt to generate a yield over time. For example, investors may steer money via financial instruments like shares and bonds into economic activities, and attempt to extract returns in the form of dividends and interest. They aim to extract the highest short-term yield, from the minimum amount of expenditure, preferably at the lowest possible levels of risk.


Permaculture is a body of thought that attempts to build ecological dynamics into design. A permacultural designer entirely understands the idea of obtaining a yield from the earth by investing time and energy, but the key difference is that they attempt to do so without undermining ecological balance. The focus is on mutualistic integration with ecologies, acting in accordance with natural regenerative processes rather than parasitically exploiting them. So can we use permacultural principles to design financial instruments and institutions?

Cultivating long term balance
A classic example of a parasitic financial institution is a payday lender. The payday loan company is fixated with the short-term risks presented by a vulnerable borrower, and exploits that by demanding the highest possible interest rate from them. In so doing they further exhaust the community around them and increase deprivation. It’s akin to overfishing an already fragile river system, thereby further disrupting the ecological balance.

The permacultural designer, whether they are looking at fisheries or financial inclusion, will seek instead to build up the productive potential of the overall system. A permacultural financier thus looks to strengthen vulnerable borrowers, working with them to improve their credit-worthiness. The Permaculture Credit Union in Santa Fe is one such example of a regenerative financial institution. If we think in terms of economic energy, they aim to cultivate long-term energy balance, rather than extracting maximum short-term energy before collapse.

Observe and interact
But how do we get to a point of designing such systems? Anyone familiar with permaculture knows that it has 12 principles of design. The first, and perhaps most important, principle is ‘observe and interact’. Mainstream financial institutions such as large banks pay little attention to the cultural nuances of the communities they descend upon, and their designers certainly do not interact with such communities in any meaningful sense. They offer standardised products and services, no matter where they are, and in areas where these don’t work, the banks are simply not found (known as ‘financial exclusion’).

Alternative finance practitioners need to be attuned to the needs of their environment. I recently held a workshop at Shambala Festival where we explored the idea of building a pop-up currency for the duration of the festival. Several participants suggested we create something like the Brixton Pound, a local currency used for commerce in South London. The point of the Brixton Pound though, is to harness economic energy that would otherwise flow out of Brixton. The economic ecosystem of Shambala Festival, unlike Brixton, is already inherently local, so there is minimal need to introduce such a currency into that environment. To build something more interesting requires a much deeper observation of why people are at the festival (it’s not for commerce, for example), and how a different system of exchange might add a new dimension to that experience.

In anthropological terms, we might call this as ‘participant observation’, where you engage in slow observation and interaction with a particular cultural environment to experience the nuances. Through this process one can begin to get a feel for how a more integrated, inclusive, and interactive system can be built. A key problem in modern finance is just how disconnected people feel from it. Consider the average high-street bank. The people standing in the queue or using the ATM often appear utterly disconnected from the process. They often don’t know where the money comes from, or where it goes to. By contrast, a simple peer-to-peer lending platform like Abundance Generation – which allows you to lend directly to renewable energy projects – has reconnection embedded into its design.

Zones and diversity
Permaculturists are intensely interested by the flows of energy within and between different ecological zones and how to balance it. For example, in agricultural design, they’re thinking about how the household interacts with the immediate garden, and how the garden interacts with the zone of semi-wilderness beyond. They’re seeking synergies between the diverse components. This fostering of diversity is fundamental for building resilience (not having ‘all one’s eggs in one basket’), but the interrelations between diverse parts is also viewed as a source of creativity.

The mainstream financial sector is the ultimate monoculture. Not only is it not resilient, but it’s also not very creative or responsive to change. The banking sector is generally only good at one thing: extracting short-term profit whilst concentrating power in a single set of large institutions. What we rather need is something akin to an ‘open source’ financial movement, where that power is spread out to networks of smaller institutions, where access to financial services is widened, and where the means of producing financial services is extended to people who previously had little input. Local banking is one important element of this ethos, but we also catch glimpses of it in the array of niche crowdfunding platforms that have emerged, offering financing opportunities to projects that most banks would ignore.

Financial holism
At the core of permaculture is holism. Much mainstream thought encourages people to box aspects of their lives into intellectual silos, like ‘my economic life’ and ‘my political life’. That’s a terrible way to start a design process, because it ignores the inherently multifaceted nature of all our actions, and that we are always balancing various objectives and values. For example, a large national currency may be very efficient for exchange, but that very same efficiency can act to atomise individuals by weakening the ties of trust that would otherwise be required for exchange. Thus, rather than seeking to design for single, specialised and segregated uses (maximising a particular outcome), a permacultural designer seeks out holistic optimisation: For example, how does one create a currency that achieves efficiency without alienating people from one another? Can a local currency like the Bristol Pound blend the efficiency of mobile payment with the goal of energising local community exchange?

Very importantly, holism also involves integrating yourself into the design process, rather than imagining yourself as an objective outsider. Activists taking on the financial sector spend much time pitching themselves against the system, but frequently take little time to see how they personally form part of it. Have you ever wondered how the mainstream financial sector imprints itself and replicates itself in your own thoughts about exchange, and in the language you use? Much of the power of the financial system is predicated on people unconsciously deferring power to it without realising it. True holism, and the key to unveiling the hidden design principles in existing systems, is as much about observing yourself as it is about observing Canary Wharf. Think about it next time you take the note out of your wallet.


Seedbombing the Frontiers of Ecological Finance


So how does the aspiring permacultural designer start making their visions a reality in the financial sector? After all, if you're surrounded by a monoculture it's hard to seed new ideas. It's helpful in this context to take inspiration from the guerilla gardening movement, and in particular their technique of seedbombing. Seedbombing is the act of chucking compressed bundles of seeds into rigidly controlled gardens. Most of the seeds don't make it, but it's fun to try, and what's more, every now and again one actually establishes an outpost for itself.

Using this as an analogy for economic change, we need to constantly create portfolios of alternatives and throw them into society, learning from what works and what doesn't. That's how great institutions like Ecology Building Society got started - a group of people with an idea went ahead and just did it. These solutions are often small, but that's the point. We don't want to replace one monoculture with another monoculture. The ideal is to create a rich, responsive jungle of creative and resilient services, rooted into the reality of their local context.

Postscript...
After I wrote this article I went to Totnes to talk on the topic at an event organised by Transition Town Totnes, Schumacher Colllege and Totnes REconomy Project. You can see the video below. I also discovered the Financial Permaculture Institute and Perennial Solutions which have looked at this topic before, so check them out too. Cheers



Wednesday, 29 June 2011

House Rent Blues: On legal loansharks and crowdfunding


So I haven’t managed to get a blog post out for a couple weeks. That’s partly because I’ve been having some cash-flow management problems, due to some crap planning on my part and some unfortunate payment delays. This is an ongoing issue in freelance life, to smile through gritted teeth when someone at an organisation tells you the admin guy went on holiday and forgot to process your invoice. In a situation when one’s reserves are marginal, small frictions in the system can wipe you out.

Needless to say, when my landlord sent me an sms a few weeks ago saying ‘You haven’t paid your rent, and you have six months of bills to pay too,’ I got a deep down chill. My landlord is a cool guy. He only has one name, and our contract is informal at best, built on trust and belief in human nature rather than legal structures. That’s why he gave me some leeway, and that’s also why I didn’t want to abuse that trust. So I called up my friend George, and asked him what I should do. He wrote a song for me with some suggestions about how to deal with the house rent blues:


It’s an ancient blues, the house-rent blues, and financial services for people suffering from cash-flow irregularities are probably as old as the moon. Short-term loans attached to long-term shackles have long been the speciality of a certain class of societal demon called the Loan-Shark. I’ve been seeing the Loan-Shark in my dreams, under a bridge, at the crossroads of Highway 61 and Highway 49, right there in Clarksdale where John-Lee Hooker wrote the song. In that dream the Loan Shark says “35% interest per month, secured on your soul” and hands me a contract to sign. “That’s pretty steep” I say, “Are you regulated by the SEC?” He’s taken aback. “Hell no brother, but you can count on me.” I look at the small print on the contract. It says: “You can check out any time you like, but you can never leave.” Yes it’s true, the Devil uses clich├ęs from the Eagles.

The dark desert highway of the Loan Shark extends around the world. You find them in Brazil, you find them in them in South Africa. In Bangladesh you’ve got the ‘5-6’: The guy that loans you 5 taka in the morning, and gets 6 taka back from you at night. That’s 20% interest in one day, which is about 7200% interest annually, uncompounded. That what you call raping the time value of money.

Anyway, in dealing with my cash-flow problem I decided to stay away from Brixton’s loan sharks and to take a look at the legal pay-day loan services. Payday loans are like advances on a salary. You show them proof that you will be getting paid at some point. They advance you the money. You pay the money back with interest when you salary comes through. It’s a way to tide you over liquidity crises.

There’s a big new payday loan outlet that recently opened up by the Brixton Academy, opposite the St. Barnados Charity Shop. I had to wait for a while to get served, and watched a women in her early 30s sort of plead with them for a two-day extention on a £200 loan that she couldn’t quite pay back yet. I’m not sure there was a pleasant story behind her situation, and the lady who served her was gently refusing. It can’t be an easy job dealing with people on the thin-edge of financial stability.

LO-FI FINANCE
When my turn came, I got served by a young guy who was quick to tell me that the company is actually American, and that they have six outlets in the UK, the Brixton branch being a flagship of sorts. As for the terms of their payday loan: 25% per month, which is 300% per year, more modest than the classic loan shark, but ridiculous costly nevertheless. In order to get a £625 pound advance on your paycheck, you’d have to pay them back £780. I asked what would happen if I didn’t pay back in time. He said the matter is then passed on to their payment delinquency service, who would organise an ‘alternative payment plan’.

I reckoned I might check out some of the online payday loan services instead. Payday UK comes top of the search results. Again, the terms of the loan are 25% interest per month. Yep, for a £400 advance, you pay back £500 in a month. Wonga is another one, only this time it has a deceptively cuddly name and even worse terms: For £400 loan, you pay back £525 within a month. This really does not seem like a sustainable business model and people looking for £400 advances aren’t really the kind of people who should be spending £125 on liquidity management. There must be social enterprise models waiting to emerge in this space…

Out of curiosity I visited the pawn shop. Pawn shops allow you to pledge gold or jewelry as collateral in exchange for a loan. I didn’t actually have anything valuable to pawn, but if I did, their deal was better, at 6% interest per month. 

WILL YOU ACCEPT MY AMULETS AS COLLATERAL?
The lower interest rate is a due to the fact the loan is secured on some valuable bounty, so if you don’t pay back, they just keep your stash. Collateral lowers your ‘cost of capital’ because it provides protection to the lender, and it’s one of those unfortunate realities that those who possess collateral tend to be wealthy individuals. Some might say that that’s a reason why wealth tends to concentrate around existing wealth… ahem, Mr. Marx.

So what do you do when you don’t have collateral to base a loan off? You label yourself an entrepreneur, and you raise money against the fabulous future wealth that you claim you'll create. That’s what I was thinking when I went to a talk on crowd-funding, given by Theresa Burton from a company called BuzzBnk. The idea behind crowd-funding is that you attract small-scale (philanthropic) investors to contribute to your cause. You need a catchy story to get people to invest in you though, and ‘Can you guys give me £400 so that I can pay my landlord’ is not going to cut it. On the other hand, ‘Can you give me £3000 so I can finish my book’ just might…. Did I mention that I’m writing a book? (more on this topic later)

In the end, time constraints required that I turn to the most powerful and ancient financial service: Angel investors…. By which I mean friends, the great providers of flexible and low interest loans. Thanks guys.

The moral of the story then is that I continue to live an unsustainable life and have a great new idea for an unprofitable business: A freelancers’ co-operative to help London’s army of freelance workers deal with the ordeals of invoice delays. This sounds like a good idea, to sink my energy into something which will have… um …. marginal and sporadic cash flows attached to it, at best.

But who needs stability when you have one bourbon, one scotch, and one beer…

As for how I defeated the Loan-Shark, I had another dream last night: