The interest-free bank
March 11, 2009 5:01 AM Subscribe
The Swedish JAK bank (site in Swedish) is, in effect, a strongly ethics-driven co-operative bank which has declined to have any external commercial interests. It lends money to its approx 30,000 members free of charge, and has managed to stay in business doing so since 1965. Wikipedia has more.
Also; Documentary about JAK on YouTube (part 2, part 3, part 4)
It isn't free of charge. They require you to deposit money with them that doesn't earn interest, and then you can borrow some sum of money for a period of time. What that costs you is the foregone interest on the savings account. And you pay fees.
Not free. They charge interest they just don't call it that. Its just semantics - like islamic banks don't charge interest.
Its a low-cost mutual savings bank which is a great thing and as long as it is well run is something to be encouraged. But lets not pretend its something it isn't.
Inevitably they will have people unable to repay their loans - if they didn't charge interest the bank would eventually eat through its capital and fail.
posted by JPD at 5:10 AM on March 11, 2009 [2 favorites]
Not free. They charge interest they just don't call it that. Its just semantics - like islamic banks don't charge interest.
Its a low-cost mutual savings bank which is a great thing and as long as it is well run is something to be encouraged. But lets not pretend its something it isn't.
Inevitably they will have people unable to repay their loans - if they didn't charge interest the bank would eventually eat through its capital and fail.
posted by JPD at 5:10 AM on March 11, 2009 [2 favorites]
If you can't see the difference between a fee and interest you've just failed Math 101.
posted by DU at 5:24 AM on March 11, 2009
posted by DU at 5:24 AM on March 11, 2009
Why don't you just explain the difference matter-of-factly rather than try to make them look dumb?
posted by pracowity at 5:29 AM on March 11, 2009
posted by pracowity at 5:29 AM on March 11, 2009
Interest is a percentage. Interest is also cumulative, which is to say exponential. Fees are at worst linear and usually constant.
The second paragraph of the wikipedia link describes a system that will be familiar to anyone who used BBSs back in the day or some torrent trackers today. Also, doesn't this destroy the derivatives market? (I say that neutrally or possibly with slight relish.)
posted by DU at 5:34 AM on March 11, 2009
The second paragraph of the wikipedia link describes a system that will be familiar to anyone who used BBSs back in the day or some torrent trackers today. Also, doesn't this destroy the derivatives market? (I say that neutrally or possibly with slight relish.)
posted by DU at 5:34 AM on March 11, 2009
JAK Bank is cool and all, if you don't mind bolting together your own retirement plan with allen keys and three missing bolts.
posted by rokusan at 5:34 AM on March 11, 2009 [3 favorites]
posted by rokusan at 5:34 AM on March 11, 2009 [3 favorites]
If the wikipedia entry is to be believed, I like JAK:
posted by pracowity at 5:51 AM on March 11, 2009 [2 favorites]
JAK operates under the following premises:How do we join?The ultimate goal of JAK is to abolish interest as an economic instrument and to replace it with instruments that are in the best interest of people. First aim of the bank is to offer a feasible financial instrument to its members, sustainable for the environment and serving local economy.
- The taking of interest is inimical to a stable economy
- Interest causes unemployment, inflation, and environmental destruction
- Interest moves money from the poor to the rich
- Interest favours projects which tend to yield high profits in the short-term
posted by pracowity at 5:51 AM on March 11, 2009 [2 favorites]
If you can't understand that "savings points" and interest are the same thing you have failed life.
posted by JPD at 6:05 AM on March 11, 2009
posted by JPD at 6:05 AM on March 11, 2009
Are savings points exponential? Do they involve wealth transfer in real dollars?
posted by DU at 6:11 AM on March 11, 2009
posted by DU at 6:11 AM on March 11, 2009
Yes they do involve wealth transfer in real dollars and they are exponential.
posted by JPD at 6:12 AM on March 11, 2009
posted by JPD at 6:12 AM on March 11, 2009
Also what do you think points on a home loan are? Capitalized interest paid in the form of a fee. I'm not even arguing about the fees. That's not what is masquerading as interest - but since you had to be insulting in your original post I feel a need to point out that even on your fee point you are incorrect.
posted by JPD at 6:23 AM on March 11, 2009
posted by JPD at 6:23 AM on March 11, 2009
Yes they do involve wealth transfer in real dollars and they are exponential.
Please elaborate.
posted by DU at 6:40 AM on March 11, 2009
Please elaborate.
posted by DU at 6:40 AM on March 11, 2009
Please elaborate.
Sure. First thing you have to realize that you can't just go to these guys for a loan. You have to be an account holder and the amount of money you can borrow is a function of the "Savings points" you have accrued by having a balance in your non-interest bearing savings account.
If you go to a regular bank you have an interest bearing savings account that compounds over time. If you have a savings account with these guys your account does not accrue interest, so in real terms there is a transfer of wealth from you to the borrowers who are also not paying interest. The way in which these guys have to operate in order to remain solvent is that the amount of foregone interest from the savings account > the benefit from the interest free loan - because they let you borrow less then you saved with them. If they didn't do that any losses incurred on the loans (which are inevitable even with the best of intentions) would erode their capital base with no ability to rebuild it (because they don't earn spread income between their assets (loans) and their liabilities (savings account))
I'm not saying it is a bad thing or that these sort of things shouldn't exist - I'm just telling you that the statement they don't charge interest is disingenious. Its playing with semantics.
posted by JPD at 7:24 AM on March 11, 2009
Sure. First thing you have to realize that you can't just go to these guys for a loan. You have to be an account holder and the amount of money you can borrow is a function of the "Savings points" you have accrued by having a balance in your non-interest bearing savings account.
If you go to a regular bank you have an interest bearing savings account that compounds over time. If you have a savings account with these guys your account does not accrue interest, so in real terms there is a transfer of wealth from you to the borrowers who are also not paying interest. The way in which these guys have to operate in order to remain solvent is that the amount of foregone interest from the savings account > the benefit from the interest free loan - because they let you borrow less then you saved with them. If they didn't do that any losses incurred on the loans (which are inevitable even with the best of intentions) would erode their capital base with no ability to rebuild it (because they don't earn spread income between their assets (loans) and their liabilities (savings account))
I'm not saying it is a bad thing or that these sort of things shouldn't exist - I'm just telling you that the statement they don't charge interest is disingenious. Its playing with semantics.
posted by JPD at 7:24 AM on March 11, 2009
A bank that does not charge interest is losing money. Banks that don't charge interest or its equivalent fail.
It is call the time value of money and it is the first thing you learn in any finance class. A dollar today is worth more than a dollar next year and you can calculate how much more it is worth pretty easily.
If you can't see the difference between a fee and interest you've just failed Math 101.
Money is fungible. Therefore it is immaterial whether something you have to pay is labeled "interest" or a "fee." You are still paying for it, either via a one-time payment or a series of small ones. Interest is merely a fee based on a percentage. There's no difference to the person paying.
posted by Ironmouth at 7:24 AM on March 11, 2009
It is call the time value of money and it is the first thing you learn in any finance class. A dollar today is worth more than a dollar next year and you can calculate how much more it is worth pretty easily.
If you can't see the difference between a fee and interest you've just failed Math 101.
Money is fungible. Therefore it is immaterial whether something you have to pay is labeled "interest" or a "fee." You are still paying for it, either via a one-time payment or a series of small ones. Interest is merely a fee based on a percentage. There's no difference to the person paying.
posted by Ironmouth at 7:24 AM on March 11, 2009
The second paragraph of the wikipedia link describes a system that will be familiar to anyone who used BBSs back in the day or some torrent trackers today. Also, doesn't this destroy the derivatives market? (I say that neutrally or possibly with slight relish.)
How does it 'destroy' the derivatives market? It's not even related to the derivatives market. I assume they could take out insurance on their loans if they wanted too.
Also, I agree that a fee and interest can be the same thing, if you have a loan with a certain time period to pay it back: Like a student loan or mortgage, the amount of money paid in interest will be fixed as long as you pay on time. If you had a one-time fee and then a fee for late payments, the effect would basically be the same (With the exception that they would not grow exponentially each time you missed a payment)
posted by delmoi at 8:10 AM on March 11, 2009
How does it 'destroy' the derivatives market? It's not even related to the derivatives market. I assume they could take out insurance on their loans if they wanted too.
Also, I agree that a fee and interest can be the same thing, if you have a loan with a certain time period to pay it back: Like a student loan or mortgage, the amount of money paid in interest will be fixed as long as you pay on time. If you had a one-time fee and then a fee for late payments, the effect would basically be the same (With the exception that they would not grow exponentially each time you missed a payment)
posted by delmoi at 8:10 AM on March 11, 2009
I would like it if somebody who knows how to balance a checkbook could please compare/contrast this bank to/with the usual US-style credit union.
posted by box at 8:22 AM on March 11, 2009
posted by box at 8:22 AM on March 11, 2009
Box: like JAK, credit unions are member-owned nonprofits. They exist for the benefit of their members. The distinction here is the unusual way JAK assesses fees as a proxy to avoid the appearance of collecting interest. I suspect that this has something to do with JAK's origins.
In a society with increasing wealth, money is worth more in the present than in the future. In such a society, interest isn't usury, and equating the two is an error (Back in the past, wealth was created much more slowly, which is why islamic and christian prohibitions against lending with interest made more sense at the time)
posted by leotrotsky at 8:39 AM on March 11, 2009 [1 favorite]
In a society with increasing wealth, money is worth more in the present than in the future. In such a society, interest isn't usury, and equating the two is an error (Back in the past, wealth was created much more slowly, which is why islamic and christian prohibitions against lending with interest made more sense at the time)
posted by leotrotsky at 8:39 AM on March 11, 2009 [1 favorite]
The only thing that seems to make their "savings points" system different from a traditional interest-bearing account (aside from the savings points being irredeemable for anything except a loan at the same bank), is that the points are awarded linearly while interest compounds exponentially.
E.g., if you have $1000 (or Euro, or SEK) and the savings-point-rate is set at 0.9, you'll end up getting 900 points per month (or whatever time period you prefer), every month, as long as the balance is maintained. In a traditional account with, say, a 3% APR, you have a monthly rate of about 0.247%, so the first month you get $2.47, the second month you get (1000+2.47)*0.00247 = $2.48, etc. By the sixth month you're making about $2.50/mo.
However, my instinctive feeling is that this difference, while it looks significant on the surface, doesn't make the actual real cost of borrowing that much different in the "interest free" case versus in the traditionally compounded one. Although the interest on savings compounds in a traditional bank, interest on the loan does as well, so there's no advantage. And the spread in interest rates between what your savings accrues and what you pay on a loan is similar to the savings-point multiplier being less than 1. In either case, you are unlikely to be allowed to keep $1k in the bank for six months, and then turn around and withdraw it and borrow $1k for six months, at zero cost; if you could do that, the bank would quickly go out of business (due to overhead costs, the occasional default, etc.).
I like the "interest free" system however, not because it's cheaper, but because it's simpler. A major drawback to the modern financial system is its complexity and opacity to the casual user. It's never a good situation when lots of people have their livelihoods tied up in a system that, to them, is a total black box. Or even worse, when they peer into the box and are unpleasantly surprised by the mechanism concealed therein (e.g. all the videos and pages "exposing" the money-creating aspects of fractional-reserve lending).
I wouldn't want to eliminate interest-based banking because in general I think it's a powerful and incredibly useful thing, but it would certainly be good if there were simpler alternatives available for casual users who don't want to take the time to understand how modern banking actually works, or are uncomfortable with it once they see how it really operates.
posted by Kadin2048 at 6:43 PM on March 11, 2009
E.g., if you have $1000 (or Euro, or SEK) and the savings-point-rate is set at 0.9, you'll end up getting 900 points per month (or whatever time period you prefer), every month, as long as the balance is maintained. In a traditional account with, say, a 3% APR, you have a monthly rate of about 0.247%, so the first month you get $2.47, the second month you get (1000+2.47)*0.00247 = $2.48, etc. By the sixth month you're making about $2.50/mo.
However, my instinctive feeling is that this difference, while it looks significant on the surface, doesn't make the actual real cost of borrowing that much different in the "interest free" case versus in the traditionally compounded one. Although the interest on savings compounds in a traditional bank, interest on the loan does as well, so there's no advantage. And the spread in interest rates between what your savings accrues and what you pay on a loan is similar to the savings-point multiplier being less than 1. In either case, you are unlikely to be allowed to keep $1k in the bank for six months, and then turn around and withdraw it and borrow $1k for six months, at zero cost; if you could do that, the bank would quickly go out of business (due to overhead costs, the occasional default, etc.).
I like the "interest free" system however, not because it's cheaper, but because it's simpler. A major drawback to the modern financial system is its complexity and opacity to the casual user. It's never a good situation when lots of people have their livelihoods tied up in a system that, to them, is a total black box. Or even worse, when they peer into the box and are unpleasantly surprised by the mechanism concealed therein (e.g. all the videos and pages "exposing" the money-creating aspects of fractional-reserve lending).
I wouldn't want to eliminate interest-based banking because in general I think it's a powerful and incredibly useful thing, but it would certainly be good if there were simpler alternatives available for casual users who don't want to take the time to understand how modern banking actually works, or are uncomfortable with it once they see how it really operates.
posted by Kadin2048 at 6:43 PM on March 11, 2009
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posted by ilike at 5:08 AM on March 11, 2009