This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 14 - June 20, 2016.
While values-based banking could be the answer to many of the challenges in today’s financial system, Almedal acknowledges that it does not have all the answers. “Values-based banks are too small to give out large loans. Even if you combine the borrowing power of 10 values-based banks, we may still not be able to finance mega-projects such as the Kuala Lumpur Twin Towers. This kind of development needs is what we don’t have the answer to,” he says.
Some values-based banks are financially healthy, such as the GABV member banks. According to the Real Economy–Real Returns: The Power of Sustainability-Focused Banking 2015 report published by GABV, the return on assets and return on equity for values-based banks have been relatively stable and profitable compared with global systemically important financial institutions.
Almedal says some of these banks could have been investing in environmentally friendly technology, such as renewable energy investments, for a long time and their investments may have recently paid off. However, JAK does not make such investments as it would mean “making money out of money”.
“Unfortunately for JAK, we were loss-making last year and we see a possible loss this year. There were mainly credit losses, but it was also the high costs due to the compliance with new rules and regulations such as financial inspections and capital conservation buffer,” he says.
“This [compliance] is almost the biggest challenge for most of the banks. We had to hire banking professionals to work for us in order to be compliant. We did not anticipate these costs. I would say that we are still in the adjustment period in terms of cost, products and services. I think we should be better prepared in one to two years,” he says, adding that the bank seeks to attract more members to become more sustainable.
Like many countries, Sweden introduced a negative interest rate to spur its economy (-0.1% in February last year). The rate was lowered to -0.25% in March, -0.35% in July and -0.5% in February this year.
According to the Swedish central bank, Riksbank, its very expansionary monetary policy has helped strengthen the economy and reduce unemployment, and has contributed to an upward trend in underlying inflation since the beginning of 2014. This, however, has caught JAK in an unprepared situation while dealing with its over-liquidity.
To tackle both issues, the bank will soon introduce a system called “flexi-loan”, which will allow new borrowers to lower their loan cost by increasing their savings and repayment amounts. Should members opt to deposit lower amounts in both savings and repayments, they will be charged a higher loan cost. This system will also allow members to apply for larger loans, says Almedal.
“Without the flexi-loan option, if one of our members needs to take a one million Swedish kronor loan, we may only be able to supply 500,000 Swedish kronor. But under the flexi-loan, it would possible for him to take up the one million loan because he will either deposit higher savings or repayment amounts,” he says.
“If he wishes to decrease the amount of savings, the loan cost will be higher as the risk for the bank increases too. If he cannot repay the loan after several years, we can take what he has saved in the bank. But if he has not saved enough, we will have the greater risk, which is why we need to increase the loan cost.”
The “save later” and “flexi-loan” options were developed to suit the needs of the younger generation, who hope to see more flexible products from the bank. Almedal says these will also help the bank get rid of the over-liquidity, as he thinks money should be lent out to help the economy, instead of being idle while paying a price for it.
As there are Islamic banks operating in Malaysia, values-based banking will have a place in the local landscape, says Almedal, although JAK is currently not in active talks for collaboration with any of the local banks.
The origin of JAK Medlemsbank
JAK Medlemsbank began in Sweden in 1965, inspired by JAK in Denmark, which was started by a group of Danish farmers who created their own currency and took interest-free loans from each other during the economic crisis of the 1930s to keep the economy running.
JAK in Sweden started out as a non-profit organisation and it did not have any money to lend to its members, says CEO Sammy Almedal. So, it had to come up with the savings and loans system. Members would need to have savings in the bank, earning them saving points, before they could take out a loan.
According to its website, the members’ deposits finance all the loans — there is no external financing. Thus, the total amount of loans disbursed cannot exceed the members’ deposits plus the equity of the bank.
“In the late 1990s, the Swedish authorities announced their intention to introduce legislation to help meet the need for regulations of the savings and loan business within associations. JAK prepared for the adoption of the new conditions and received its full banking licence in 1997. JAK was then renamed JAK Medlemsbank and started its banking business in May 1998,” the website says.
As the bank started to have more members in the 1990s, it built up its liquidity. Rules were then relaxed to give members the option to either fulfil their savings duty before taking up the loan or during the loan repayment period.
“You will get savings points for what you have saved in the bank. You can use the accumulated points by yourself or give it to someone else. Here’s how: If you have four million points [which equals to 100,000 Swedish kronor] and need a 100,000 Swedish kronor loan, you can come to the bank and apply for a loan,” says Almedal.
“The bank will evaluate your financial status — we are subject to the same rules as any conventional bank when it comes to loan approval — and decide if you can get the loan. If you already have enough savings points, then you will only need to repay the loan during the fixed period.”
In the case of one not having enough savings points, or none at all, Almedal says the borrower will have to undertake savings and pay back the loan simultaneously, according to the loan agreement that will be determined.
He says the concept of depositing savings and paying back a loan simultaneously is to “suffer now and enjoy later”. Under this system, the member will not only be free of debt after he has repaid the loan, he will also have savings in the bank.
While it is an interest-free bank, it charges 3% loan cost to cover the administration fee and risk of loan defaults. This is higher than conventional interest rates, which range between 1% and 1.5%, because JAK does not have a large membership base to spread out the cost, says Almedal.
Today, JAK Medlemsbank has 40,000 members, 28,000 of whom have savings amounting to 1.5 billion Swedish kronor. Meanwhile, 8,000 members have taken loans with the bank, amounting to 900 million Swedish kronor.
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