Friday 29 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 14 - June 20, 2016.

 

Values-based banks and their Islamic counterparts may share certain principles such as being ethical and not charging interest, but that is where the similarities end. The former operate based on common values while the latter do so on religious beliefs, says Sammy Almedal, CEO of Sweden-based JAK Medlemsbank, or “members bank” in English. 

“We operate based on what people think is right or wrong, not on how big banks and the great inequalities in the current banking system impact people — we don’t do that,” he says. 

Almedal says the biggest difference between the two types of banking is in the pursuit of profit. “We do not have a policy of profit generation and distribution, but Islamic banks do have to generate healthy profits and distribute them to their shareholders — it is one of their mandates. I think this clearly differentiates values-based banking from Islamic banking.”

Values-based banks, such as JAK, may not focus on generating profit for their owners, but it does not mean the bank is not supposed to establish a sound and stable financial system and have surplus funds, he says. 

“No one can make money out of the bank itself. When the bank has a surplus, it does not get distributed to anyone. The surplus goes directly back into the bank to help lower the loan cost and make our products more attractive. This will benefit the bank’s owners in the long run,” says Almedal.

“More importantly, an Islamic bank shares the risk with its customers. But values-based banks, such as ours, try to eliminate the risk,” he points out, adding that the bank only places its money in investments that are almost completely risk-free such as sovereign debt securities.

 

Financing the real economy

Based in Skövde, Sweden, JAK is a wholly member-owned cooperative enterprise that runs on a unique interest-free savings and loan structure. It has often been referred to as the safest bank in that country. It only finances the real economy, is highly transparent and serves the local community. While it is not a member of the well-known Global Alliance for Banking on Values (GABV), it shares similar principles.

“At JAK, no one can pay to obtain more influence in the bank. Putting more money with us does not give one more benefits. Every member is treated equally here,” Almedal tells Personal Wealth on the sidelines of the Global Islamic Finance Forum in Kuala Lumpur recently. 

“JAK is an alternative for people who do not want to see greed in a bank. Instead, they want to know that their money is going towards doing the right thing,” he says. 

“We lend to our members to do such things as starting a small business to create job opportunities or buying a house for the family. That is the purpose of money — to make a real positive impact. JAK plays a role in seeing that the money is repaid to the lender while playing a role in driving the real economy,” he adds.

“JAK does not offer wealth management products because that would contradict our principle of not making money out of money. We don’t invest in speculative investments.”

Almedal points out that a problem with conventional banks today is that they prioritise their shareholders more than anyone else. “One will have bigger influence in the bank if he invests more money in it. The bank has to create profit from nothing to reward its shareholders, who expect a form of return from their investment.”

For values-based banks, says Almedal, it is never to make more money out of money. They believe that money should just be a substitute for the barter economy. 

“When money is used to generate more money out of nothing, it creates imbalances and ultimately, leads to financial crises as people with more money are willing to take high risks to create even more money, and people with less money will be poorer,” he points out.

“As a values-based bank, we avoid any high-risk investments. So, speculation in currencies and stocks does not happen in our bank. We do not have the kind of thinking that caused the subprime mortgage crisis in 2007/08. 

“Conventional banks do not think of the long-term gains as they concentrate on raking in great profits within the shortest time. Values-based banks think about long-term gains that will serve the future generation.”

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