Eco-Economy: Job machine misses great opportunity

Jim's job machine won't work. So disappointing, such an oppportunity for regional development, but just the wrong model! The publicity so far omits all mention of the best banking models for financing small businesses and it looks unfortunately to be quite separate from Jim's bank.

The Dominion report (Wed July 5) said 'Industry New Zealand was charged with encouraging innovation, investment for good ideas and helping business with potential to grow and succeed.' Last month's budget allows for $331 million to be spent over four years to help regions develop their economies and the export sector.

Well some of it may work. I don't know. But to me it seems to be an oldfashioned remedy of a central government where hopeful businesses apply to a central authority and wait to be chosen. Then the money runs out. We have already had the Development Finance Corporation which found around 80% of new businesses failed. The record of the regional development boards has not been spectacular either.

Surely the role of a central government seriously committed to supporting job-rich small business is not to be a centralised Father Christmas or even set up regions to be mini Father Christmases, but rather a wise parent who sets the conditions under which business and good banking thrive together.

First they need to supply national currency in a form which is interest free or allow regions to do it too - not like the current set-up where private foreign owned banks supply 98% of the country's currency as interest bearing debt for profit. The result is a dog eat dog environment where some businesses simply must fail. Why is this? When a loan is issued.debt money is created Since only the capital is issued and not the interest, businesses have to either go further into debt or impoverish each other. They are all in competition with one another to get money to service their loans. No wonder some fail! Continuous investment is required, and every business has to grow or collapse. In this environment only the fastest growing businesses survive.

Secondly central government has an obligation to provide conditions which support financial institutions employing successful models of financing small businesses. Three models I know of should be seriously examined. Hopefully some region might pick them up. Not surprisingly all have structures where more than one person has a stake in the success of the business.

1. Mondragon's cooperative bank in Spain has for many decades successfully supported and financed producer or worker cooperatives . Since the bank has a serious interest in ensuring the success of the venture, they assign each cooperative a 'godfather' who has a major role to playin setting strict rules and supervision.

2. The bank founded by Bangladeshi professor Mohammud Yunus for his Grameen Bank has been a remarkable success. When he was first approached by a woman wanting a small amount for a sewing machine or a cow, he said to her 'I don't want to see your business plan. Go out and get three of your friends, convince them you will succeed, get them to back you. Then come back to me and I will lend the money to your group. If you pay your loan back then and only then will I consider lending money to your friends for their businesses.'

In 1996 I attended a meeting in London where Yunus said that over 95% of the loans were paid back. I understand he has now written a book called Banker to the Poor. If the Grameen Bank can stimulate regional development by successfully lending to Bangladeshi women, probably among the least creditworthy people in the world, then we can do it here too.

3. Islamic banks allow only one kind of loan and that is qard-el-hassan (literally good loan) whereby the lender does not charge any interest or additional amount over the money lent. The lender must share in the profits or losses arising out of the enterprise for which the money was lent. Islam encourages Muslims to invest their money and to become partners in order to share profits and risks in the business instead of becoming creditors. As defined in the Shari'ah, or Islamic law, Islamic finance is based on the belief that the provider of capital and the user of capital should equally share the risk of business ventures, whether those are industries, farms, service companies or simple trade deals. Translated into banking terms, the depositor, the bank and the borrower should all share the risks and the rewards of financing business ventures. This is unlike the interest-based commercial banking system, where all the pressure is on the borrower - he or she must pay back the loan, with the agreed interest, regardless of the success or failure of the venture.

Sorry to be so pessimistic on Jim's job machine. To me it is a badly missed opportunity, and I hope it can be turned around.

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