In a globalized world, macro elements and micro elements interact on each other. As well, local initiatives have impact on global activities and vice versa.
Hard currencies (national currencies) and general finance are strongly linked: they are both designed at a global and national level and address global and national issues. Complementary currencies (CC) have existed for centuries and played a central role during the middle ages and until the 18th century on the stabilization of the economy during hard times. They consist in currencies that are designed to facilitate the exchanges when hard currencies are not circulating enough or inappropriate. Local or complementary currencies exist and appeared for the exchange of services, exchanges between local producers and consumers or exchanges dedicated to a specific sector (miles from airplane companies for example).
Microfinance and complementary currencies have common characteristics: they are both enrooted at a local level and address specific issues. Why then microfinance uses only "official" currencies while complementary currencies might work with microfinance? How come microfinance institutions that face liquidity issues don't create their own money? CC are successfully used in the North to address poverty, employment and local issues , above all they are interest free, how come such a tool isn't already used for developing countries?
In the following paper we will first analyze the characteristics of a complementary currency with examples, then we will analyze one case that already uses Microfinance and complementary currency and afterwards we will discuss the potential links and application of complementary currencies with microfinance.
Complementary currencies: local application, global implications
Definition
the CC, by definition, are currencies that are used along with other currencies to address specific issues. The aim of complementary currencies is not to replace the national currencies; it is "to connect unmet needs in national currency with under-used resource." That is to say, to be used to facilitate the exchanges where national currencies fail to work.
A money as such doesn't have to be national or official to be considered as such. Every tool that is a counting unit and a means of payment at the same time is considered as money.
With CC prices are set up on mutual agreement or follow the national currency price.
Some historical elements (Lietaer 2008)
Currencies have appeared around 580 BC in ancient Greece and have been used since then by all the civilizations. But the currencies made of gold or silver at that time were mainly used for large expenses (wars, ships… ). So, for daily exchanges, several other currencies were used at the same time, each dedicated to specific purpose : local trade, long distance trade, taxes, savings, etc…
Appeared in ancient Greece around 580 BC, the currencies (coins) have been used since then by all the civilizations, but until the 18th century, people were used to use several currencies as the same time, because each currency had its own function. In the middle ages, a dual system of money existed : the first type was coins made of gold or silver that were used for long distance exchanges and were sealed by the kings. The second type of currency were smaller coins made of copper, plumb or other non precious metal, they were used for local exchanges and emitted by local authorities, cities or religious communities.
CC appeared locally to answer a need for new means of exchange when royal currency were inefficient or not adapted to address such needs. The inner value of the royal coins tends to slow down the exchanges in that currency because people saved them instead of using them for exchange. On the contrary, the CC were much used because they were only used for local exchanges.
In the 18th century, regional currencies have almost disappeared. As B. Lietaer wrote in les monnaies régionales (2008), "During the 18th century, regional monetary systems have not been abolished for economic reason. The real reason is rather to be found in the unifying aspirations of central authorities: monarchies and later republics. Monetary homogenization has become worldwide and has been "sold" as an equivalent to modernization and as the only mean for economic efficiency."
More recently, CC re-appeared during recession periods: the great depression in Europe and in the USA in the 30's , during the war or during the monetary crisis in Argentina in 1999-2002. In both cases, the national money had lost its value, so people turned to alternative means of exchange in order to keep on exchanging goods and services. In 1934 in Swiss, 16 small and medium companies created a CC called the WIR, in order to facilitate the exchanges between them. Since then this CC still exists and gather more than 60 000 companies. Several studies (Stodder, 2005) showed that the stability of the swiss economy can be partly explained by the WIR. In times of booming economy, the use of WIR slows down, and when times are getting harder, the WIR is more used.
CC re-appeared also to react against "official" currencies accused to create a bias in the notion of wealth: speculation and activities that harm environment can create wealth, while domestic work and benevolent activities are not valued. In addition to that, in opposition to the present economic model, the scarcity of money is considered as a limiting factor for the exchanges and induces negative impacts on the low-income communities.
Presently in the world, more that 1900 community based-currencies exist and have proved to be efficient, we can wonder why then CC are not much known and used.
A need for a new paradigm
Mainstream economics and businesses base all their models and theories on the assumption that there is only one mean of exchange : national or transnational currencies : Dollars, euro, Yen, etc… As economists deal with problems solving, they dare to question every model , every theories and every assumption except one : the monopole of money (with interest rate) on exchanges. (Lietaer 2001)
In order to consider a really new approach, it is necessary to take into account that "official" currencies are not a starting point, they are a variable and they don't necessarily hold a monopoly in the exchanges. In that sense, CC should not be considered as a marginal idea without any potential for change, but on the contrary should be consider as one of the existing processes to be taken into account when questioning any economic model.
As we will see, when people have dared to use CC , they take different forms and types but address common issues.
Different types of complementary currencies
CC exist today and have been set up worldwide by several communities of people taking different forms to address 3 main issues :
Re-localize economy on specific a territory, making local exchanges more dynamic between local actors
Encourage exchanges and activities that official currencies doesn't usually value
Increase social cohesion.(MOATI, 2006)
Currently we can distinguish two main groups of CC :
CC based on social trust and/or time : the mutual credit system
These CC are especially designed to exchange services and create social link. They consist in exchanging a service with another people for a certain amount of credit which is not linked to a value of the market (euros, dollars etc..). Some relate to the time spent to provide this service, some other depend on the skill involved to provide this service or any other common value that is agreed among the group of people sharing this currency. Once the service is done, the person A that provided this service get one credit, and the person B that received this service get one debit. The person that have a credit can use it to ask for another service to a person C or D … In that way you can provide a service to someone and ask a service to someone else to compensate.
The services offered can be as various as : teaching mathematics, cleaning the windows, reading a book aloud, fixing a faucet, gardening, cooking, sharing its knowledge about astronomy, car repairing or coffee brewing…. In certain cases, goods can be exchanged also that way by mutual agreement between the 2persons.
The particularity of these local currencies is that :
there's no interest rate , so no incentive to capitalize on this currency
you can ask for services even if you are debtor (up to a certain point) ,
you can give your "credits" to a friend ,
the currency can be dematerialized : credits and debits are counted on a card with double signature to validate the transaction OR centralized to a general accountant that update every member's credit.
..or take the form of coins and bills
Time based CC are tools that recognize the value of people according to what they are and not to what they have. Indeed, with Time-based currencies, even the poorest people can be rich of experience and time, and giving this time for others would provide him the credits to ask for services to others in return.
These systems are called LETS in the UK(local exchange trade system) or SEL in france (systemes d'échanges locaux), … and they use several names for their own currencies : Time dollar, sel , blé, bubbles, leaves, flowers, ithaca hours, …
All these systems are based on social relation, and tend to strengthen social ties and reinforce local consumption.
CC backed by hard currencies
The other type of CC that have the same value as "official currencies", are more used to exchange goods than services.
This second type of CC are issued locally either with a bottom-up or a top down approach.
Bottom up approach : ex the "Chiemgauer" was started in 2003 by 6 students and their teacher of economical sciences, the Chiemgauer is a local currency that was first created to promote the school and connect businesses to charities.
When people buy 100 Chiemgauer, they pay 100€ and 3€ go to the association of their choice. Retailers that accept Chiemgauer can convert them into euro if they pay a 5% fee. In addition to that, and in order to increase the velocity of this currency, a demurrage of 2% each 3 months is applied. The validity of the coupons can be postponed by adding stamps (=amount of demurrage).
This is a typical bottom up approach because now this concept is spreading all over Deutschland.
Top down approach:. The SOL in France is a complementary currency that was created at a national level to give an answer to the issue : "in this world of consumption how to create a link between actors of social economy ?". The government supported the creation of the SOL and provided funds, structure and skills along with local communities and association that provided field experience and network of social economy. The SOL is a dematerialized currency that is born on a personal chip card. People cannot buy SOL, they gain it by purchasing goods in affiliated stores or by providing public interest work/services (ex: for the city) Companies can also give SOL to their employees as a bonus. As soon as people get SOL, they can use them to buy products, get services or give it to a chartity. This system allows driving the consumption toward specific products by creating new incentives. The SOL is not exactly backed by hard currencies because it is not exchangeable with euros (expect few exception) but, the value of 10 SOL = 1euro to facilitate the comprehension and the use of the SOL.
Globally speaking, CC backed by hard currencies need a higher level of skill and monitoring than mutual credit system because it has to keep savings in hard currency and make it available as soon as the members want their money back.
Another type of CC that link businesses to businesses exists and is called C3: commercial credit circuit. The aim is to increase job creation among the small and medium enterprise in order to boost the local economy. The problem addressed is that SME often face liquidity problems to pay their suppliers (that ask to be paid quickly : 30days) while their own clients pay their bills slower (90days) and banks are reluctant to make short term loans.
The solution provided by the C3 is to insure the bills issued by the SME so that the SME can pay their suppliers with the bills insured. It allows filling the liquidity gap and increasing the exchanges. The supplier that received the C3 has 3 choices:
Wait until the delay of the payment is passed, the bill is paid, and the supplier that has the C3 receives the money
Exchange C3 in national currency, in that case the supplier pays extra fee to the bank as for any advanced payment
Pay its own suppliers with C3
This system already works in Brazil and in Uruguay where C3 are even accepted to pay taxes and public expenses. (Lietaer 2008)
Complementary currencies over the world:
In industrialized countries
Despite the CC are well developed in the industrialized countries, especially in the UK , USA, Germany and Japan that lead innovation in term of complementary currencies. What is specific in the industrialized countries is that CC are used as a social tool to address local issues and are often oriented towards organic agriculture or "green activities". They are also seen as an anti-capitalist way to exchange and thus gather rather high educated people with environmental consciousness and pure anti-capitalist militants. Goods and services exchanged remain limited to secondary needs. In the western countries, creating a CC is quite easy thanks to the wide spread of information systems and internet that allow people to share and find offers very quickly.
.
In developing countries:
CC are much less developed in the developing countries but are used to address more primary needs and to try to overcome an economic issue. Were they are implemented, they are much more used (than in industrialized countries), like in Uruguay, Venezuela, Brazil and Mexico that gather most of the exchange in CC in the emerging countries. Some CC are also used in Thailand, Indonesia and in south Asian countries. In Africa, only Senegal , Rwanda and South Africa gather rare attempts to use alternative money.
Most of the CC that has been developed in the developing countries has been introduced by university researchers that coordinate the actions where the CCs are implemented. As CC in the developing countries try to address economic issues, the CC used are mainly those backed by national currencies.
CC need a good understanding of their power in order to be adopted and used properly. Their development was mainly concentrated in the North until 2000's. Today CC are growing faster in the developing countries. (see annex 1 for more detailed figures)
Case studies:
Banco Palmas- Bresil
In the province of Ceara, the poorest area of Brazil, in a favela were 30 000 people earn around 180€/year/pers, Joaquim Melo, a former priest, has struggled for 20years in order to build roads, to get tap water and sanitation into the area. When the Favela has become more livable, the poorest people began to move because they couldn't afford to pay for the electricity or the water…
Then, the community that was strongly linked wondered: "why are we poor?" of course because they have no money!
So they conducted a survey to map the local consumption: which brand? Which product? And they came to the conclusion that they don't have enough money because they spend it on products that are produced outside the favela, so, as soon as the money comes in the favela, it comes out, buying international products.
In 1998, They decided to create a "community bank" and a local money that would promote the local consumption by :
Providing consumption micro-loans (at 0% interest) in Palma (the local money)
Providing production micro-loans (1,5 to 3%) in Real for the entrepreneurs and businesses that will accept the Palma for their future businesses.
The people would become "Prosumactors" : Producers/consumers/actors, and the money will not go out of the favela.
The system is controlled by the community during the "FECOL" (meeting of "prosumactors")
To check whether they will grant a loan or not they proceed in 3 steps : 1) Interview 2) Neighbors' approval 3) Accepted/refused by the Bank
Since 2002, they created a partnership with Banco do Brazil that provides production loans, software and basic banking services. Banco Palmas act as a "banking correspondent" that enables the banks to have several relay in remote areas.
Now 240 businesses in the favela accept the Palma, 30000 Palma (= 16000 USD)are circulating , 20 000 persons are using it and it enabled to create 1500 jobs. The Producers can exchange the Palmas in Reals, but consumers can't. In order to give incentives for consumer to pay in palma, a reduction from 3 to 15% is given to the consumers that pay in Palmas. Some businesses even pay a part of the wage to their employee in palma.
NB : the value of one palma equals one real , but the Number of palma issued per real is 1,5 which present a risk in case of bank run.
In order to replicate the model, the Palma institute has been created: 51 "community banks" based on the same model are now present in Brazil, in 9 different states and several projects are running in south America.
This model is working so well that the Brazilian government wants to transform this model into an official development tool.(Melo, 2009)
Wanchai - Hong Kong
A survey conducted by Sam WONG in Hong Kong in the district of Wanchai shows another type of CC : time based , applied in an emerging country with high inequalities. In the 2000's, with the burst of the Internet bubble, and latter the SRAS, poverty has worsen in Hong Kong, and informal social networks have also been weaken and the informal credits between friends or relatives were scarcer.
Hong Kong is a "city of workers", thus social network is very weak.80% of the people are not involved in community activities , 64% say that they can't even trust one of their neighbor.
The CC project was experimented in Wanchai district were 45% people earn more than 2700€/month, and 18% are under poverty line (less than 500€/month), especially new comers, and elderly people. The Aim of the project was to build a social network for low income groups and encourage them to trade, and to acquire new culture value: community building. These exchanges would be encouraged by implementing a CC based on time: One hour of service = one hour of service, regardless of the skill involved. This money can also be used to buy products or food, in that case, the price is fixed by mutual arrangement between people. In order to start the exchanges, everyone receives a 60 hour-credit for free. Then to gain hour-credit every person should offer goods or services that would be paid in hour-credit. The offers are announced in the monthly newsletter, and social workers help people defining what they can offer, and facilitate the general understanding of the system. In order to build the community and improve trade, every Sunday, they organize meetings to trade 2nd hand goods (mainly toys), offer services (domestic services) and food.
The team of the project had one manager and three social workers. In one year, they managed to gather 500 people into the exchange group. And hold monthly committee in which some members of the community were involved, lawyers, academic and accountants.
A survey showed that the reason for their participation was: 11,8% economically motivated (mainly low income), 38,2% ideologically , 8,8% widening social network (full time job) , 40% no particular reason (curiosity, invited by friends. Women are more active and involved in the project that men that don't see well how they could benefit from it. Only one third of the people made transactions in their everyday lives because they were too busy to exchange and 10% didn't need any goods or services listed.
Considering the social link aspect of the CC , on average People have 9 friends in the project but despite what was expected … 63% didn't make any new friend (most of them were men) because the Sunday bazaar was made for women , not for men and that they didn't see hour credit as "real currency" . Moreover, getting new friends requires time and poor people fear to lack time to reciprocate to their new friends in the long term. In addition to that, the analysis shows that mixed classes among the same group and currency tend to lower the trust in people among each other… because poor think that the upper class sell things they don't need, and the middle class tend to gather all the credit-hours because they know better how to earn them. A trade off has been determined also between the size of the group and the level of trust. Indeed, as the group is growing, the limited budget and number of volunteers tend to increase the pressure on the social workers that have no time left to deal with inter-class relation building. Thus, as the group gets bigger, the relationships between members are looser and less trusted.
Wong concludes with the following remark: "the limited range of goods and services offered […] are inadequate in meeting the basic needs of the poor. In addition, group participation is not cost free. It requires the poor to devote considerable time, energy, and most importantly, money to build and maintain social contacts."(Wong, 2006) Thus, a focus on CC that addresses basic needs should be preferred compared to services. This experiment shows that trying to build social network for the poor isn't maybe the main issue. Studying whether they are willing to use new means of exchange and how they could use them efficiently seems to be more adequate. The elements that drive trust between members are also to be considered for further studies. Today this experiment gathers 700 members and has been adopted by the population that tends to use more and more Hour-credits.
The limits of that experiment compared to Banco Palmas case is probably linked to the fact that in asia and in south America, the term "community" doesn't refer to the same notions. In Asia, the community refers to a restricted circle of family and close friends while in Latin America, the community includes all the people living in the same area and that have minimal common links. (DeMeulenaere 2006) Moreover, in Brazil, the CC have been implanted by the people for the people while in Hong Kong, it was an academic project that was imposed to the community. In both cases, we can see that, on the field, CC are complicated to set up and especially to be accepted. In order to address economic issues, CC that are backed by national currencies are more quickly accepted because people can better figure how much they save thanks to CC. On the other hand, a mutual credit system is much more cheaper and less complicated to set up by individuals. The example of Banco Palma shows that interactions between CC and microfinance are possible and have a positive effect on the community under certain conditions. We'll now draw some assumption concerning what could be the conditions, the advantages and the limits of the links between CC and microfinance, based on the literature of both CC and microfinance.
Potential links and application of complementary currencies with microfinance.
As we've seen, the CC are beginning to spread in the developing countries because they can address economic issues among poor communities, fight against social exclusion and empower people. Then we can wonder whether they would act as a competitor or as a potential complement with microfinance institutions.
A similar context
Microfinance is made to address specific issues at a local level, and to support development, exactly like CC with one difference: Microfinance and especially MFIs are the actors of change, while CC are tools and means for change.
Applied to the developing countries' context, Microfinance and CC offer both a new source of money for the poor. They are both enrooted in local communities and address local issues through the empowerment of people, the fight against financial exclusion and poverty. Both microfinance and CC need to be regulated and professionalized in order to be efficient and they are both various in the forms they can take in order to adapt to each context.
But some technical and ideological points tear Microfinance and CC apart.
Some elements that make them different
the table below sums up the main differences between the CC and microfinance :
Differences :
Microfinance
Complementary currencies
use national currency
based on current financial tools and system
(with interests)
developed in the South countries
Focus on poor people's development
Bring more money into the local community
Can't control how the money disbursed is used
short history but many studies and experts
use alternative currency
tries to escape the traditional financial system based on capitalist rules (no interest)
developed in the North Countries
Focus on social link and ecological actions
Uses existing money and avoid it to flow out of the community
Can create strong incentives for specific issues
long history but few references, studies and experts
Besides the difference in the currency, the ideology behind the complementary currencies is quite different than the microfinance. While microfinance brings money where it is lacking , CC tries to use existing money and unused skills, and provide a tool to keep the money inside the community so that money won't flow out. In addition to that, CC can be oriented to address specific projects (see SOL example), while it is more difficult for an MFI to make sure that the borrowers use 100% of their money on a specific issue (money is often used for both business and consumption use).
CC offers a new source of credit and of employment for the poor and implies to redefine the relation of the poor with the loan. With Micro finance, the relation is asymmetrical: people rely on banks to have credits and conditions are imposed. On the contrary, a loan in CC can be made face to face and induces stronger links between partners and empowerment of people that feel involved in the community. (Williams ,1996),
Microloans made by MFIs, often finance little shops that buy the cheapest products and sell them with a profit. These products of course are made in china or in manufacturing countries and thus, let flow the money outside the country and to the big cities were small shoppers buy their product in bulk. As J. Warner wrote: "While this is not necessarily bad, it will fail to contribute to poverty alleviation or development if the result is simply more traders with miniscule margins." CC, favoring local trade can thus help to alleviate poverty by keeping the money among the community.
One can claim that CC cannot finance small businesses but the example of the delicatessen in Great Barrington tends to show the contrary.(see annex 2). Nevertheless, if local resources are very limited, financing businesses can indeed be difficult for CC unless it is pooled with a microfinance program as it has been done in Banco Palmas.
Why and how microfinance and CC could create synergies?
Combining a tool that enable money to stay in the community , with an MFI that brings more money in the community seems to have great potential for synergies and poverty alleviation. Indeed, the synergies could take several forms (non exhaustive):
The MFI can create a CC with the help of the community, and use the community of borrowers to create a network in order to favor exchanges and increase business among the borrowers.
The MFI can grant productive loans in national currency and consumer loans in CC (based on Banco Palmas Model). As loans in CC are cheaper (without interest), it would push people to ask for more CC and use it… which would push the producers and shoppers to accept CC in order to do more business.
For the MFI, accepting CC in exchange of national currency could also a way to attract savings and can be a new source of local funding to grant loans in national currency.
MFI that are developing Mobile banking can easily create a CC that would be shared only by mobile phone and that would secure the transactions
In addition to that, poverty alleviation can be addressed by another way by CC and "mesofinance". Indeed, the C3 mechanism is the ideal tool to allow SME to grow and hire new people, which is one of the main priorities to drive developing countries out of the poverty. Indeed creating full time regular jobs, would create a bigger middle class and allow real change in the developing countries because they ask for more education, they complain to their leader and are the real drivers of change that are missing in the poor countries.(MOYO D. 2009)
The conditions of success:
The association of a CC with an MFI cannot be done at any condition and anywhere. Indeed, in order to have the greater chance of success, the project should be implemented in an area where producers and consumers are close to each other. The community should have strong social links so that changes can be driven more easily as soon as the leaders are convinced. They should also be willing to accept a new means of change.
On the issuer side, the MFI should have a very good reputation of trustworthiness among the community because the community will leave savings against the CC. If the CC is backed with national currency, the MFI should of course be regulated and/or allowed to collect savings. When creating the CC, a democratic participation of the community is necessary to involve people fully in the project so that they can adopt the CC faster. In order to start the spread of the scrip, the issuer must provide a way to use it. If CC are created with bills, they has to be absolutely non-duplicable, in order to avoid a market distortion. Finally, an exit strategy (demurrage or other) has to be prepared in case the currency isn't used anymore.
Before implementing the CC, the MFI should make sure the concept will be well understood by legal authorities and that it respect the nation law regarding money creation. As M.V.FREIRE says, "when adequately structured from the legal standpoint, each social currency system can function as a small-scale clearing house for payments among participants in the system and, as a result, there is a natural tendency towards the formation of small local stock exchanges and the generation of new business and partnership opportunities for banks in the market for microfinance" (FREIRE, 2009)
A good information system and an accurate accountancy are also required in order to well manage the dual currency system and the potential growth of it as well as the potential use of mobile phones. A sustainable CC needs an authority with professional skills that will control and regulate the creation of currency. This role can be hold by the MFI, a local NGO or a local authority.
The potential effects for the MFIs
Issuing a CC can offer some advantages for the MFI. Indeed, building a network tied by the CC can make borrowers more loyal to the MFI because the competitor MFIs don't offer CC. If the CC achieves its goal to increase the exchanges among borrowers, it will enable them to repay well. The MFI could give CC (is they are time based) as a reward for those who repaid their credit well, it would then create good incentives to repay without any cost for the MFI and then reduce moral hazard. Moreover, increasing social ties between the MFI and the members may enable an easier monitoring of the borrowers and allow less adverse selection.
On another Hand, implementing CC can be costly, especially is it's backed by official tender, it is time consuming, and the time spent compared to the expected effects has not been proven yet. Moreover, in case of failure of the CC (if it is banned by the government or rejected by the inhabitants), it could endanger the activities and the reputation of the MFI.
The potential effects for the borrowers
For the borrowers also, using a CC could have some benefits. Indeed, in the Banco Palmas case, the consumers loans are granted in CC without interest, which is much more interesting for the people than to ask for a regular loan.
If CC is implemented as a digital currency, with mobile phones, it can also be a way to secure savings and provide a reliable way to manage households' money.
If the network of CC is well developed, the exchanges can be 2 to 5 times more numerous that with regular tender.(MELO, 2009) the increase of exchanges provides a dynamic in which people consume more and invest more to develop their business. As almost every poor people is a self-entrepreneur, the effect can be multiplied because as a consumer, he will get more purchasing power… and as an entrepreneur he will have more business. All this is a question of velocity of circulation of money: the fastest money is exchanged; the more numerous are the exchanges.
Concerning the acceptation of a new mean of exchange, poor people are used to deal with various way to finance their daily lives, on average 4 to 10 different financial instruments (free-loans from neighbors, micro-loan from MFI, saving etc….) are used per year (COLLINS 2009), so implementing a CC would probably be accepted rapidly as soon as they will realize that it is money without interest and that they can use it just like official currencies.
"For rural respondents in India and Bangladesh, the intermediation of goods and services rather than cash was common, and included borrowing grain to be repaid after the harvest, repaying a loan with one' s labor, or using labor to buy farm inputs"
"Small incomes mean that poor people are more often than others placed in the position of needing to intermediate."
"too few financial instruments are available to effectively manage these uneven flows
"they find informal transactions unpleasant but unavoidable"
These quotes from Portfolio of the poor by D.Collins and Al, shows that people are already using alternative means of exchange and are willing to change them into reliable transactions. Giving an "official" frame to the existing informal transactions could lead to more trust and more quantity of the exchanges, thus we can assume that the appropriation of CC by the poorest might be fast.
On the other hand, the people can be reluctant to the CC as we will see in paragraph E- 2) .
The difficulties that could prevent microfinance and CC to work together
Combining CC with microfinance can also meet several difficulties. Indeed, a CC cannot be implemented as a ready-made solution, it has to be adapted to people lives, to their habits to the structure of the local society, and it's form depends on the social links among the community, on tradition, religion and governments regulations. If the CC is implemented regardless of these issues, difficulties can arise rapidly.
The challenges that a CC has to go through are numerous. Indeed, there is a necessity to reach a minimum size in order to work and to prove its efficiency, cooperation with the local authorities are very helpful to reach it nevertheless, among the present initiatives of CC around the world, we can observe a limit of size in the simple initiatives. This implies that in order to reach a large size, the structure and mechanisms should be clearly defined and well managed, which is rather difficult to do as an MFI because it requires specific skills to manage a creation of currency especially when the resources and means of communication are limited. Indeed this drawback and limit is so strong that it could explain why so little CC have been developed in the poor countries. In addition to that, scriptural money induces also a high level of copy which can severely distort the market and crash the new currency.
Alternative currencies can be seen as a competitor for national money. Even if it' not true, the CC by definition are used in addition to legal tender to complete it, not to replace it, the concept of a new currency can be misinterpreted both by legal authorities and by people.
Regulatory framework
Central banks can be doubtful about the utility and the legality of the CC and can even ban them because they would feel a competition with the official currency or fear a rise in inflation due to the introduction of new currencies. If the system of CC is badly managed, there is a risk to create a bubble in which people will put money and that would not be backed. This risk exists only if the issuer of the CC issue more CC than the official currency he holds as a guarantee. This risk doesn't exist when the CC is based on mutual credit or time based. Indeed when its time based, no abuses can be made since this form of money allow paying or obtaining services that are based on time and that cannot be capitalized.
In several countries (Thailand, Indonesia…) where complementary currencies were first implemented, the projects experienced disapproval from the legal authorities and, after deeper inquiry, were allowed again. But the problem when this occurs is that it creates a doubt on the reliability of the CC which tend to slow or even stop the exchanges when the CC is rehabilitated.
The legal risk with CC (backed by official tender) is also that, as it is not created by the central bank, it is not regulated, and in case of bankruptcy or bad management of the CC, no legal issue could be claimed. CC backed with official money can be powerful… but have also a potential risk. Dishonest people can use CC to collect savings, take the money and run.
People's reluctance
People can be reluctant too because they could lack confidence in a new money that is not "real" and need proof in order to accept it.
The fact that poor people lack money might influence their perception of the official money as highly valuable, compared to the new currency that has less value to their eyes.
The introduction of a CC can be difficult also due to a lack of confidence of the businesses at the beginning, that leads to a low confidence of the people in the new currency, and creates a vicious circle of doubts and fear preventing the good introduction of the currency.
Another clue to explain people's reluctance towards an new mean of exchange could be that they already have enough means of exchange and that a new mean won't bring them more money nor more food. Concerning the potential social link that a LETS can create, they may just don't need it, as they have other mean to exchange for small transactions (SERVET 2008): memory, confidence, frequent reminder… (COLLINS D. 2009)
Reluctance towards CC can also come from the world of MFI itself, that can see this new tool as way to decrease the amount of loans issued and to destabilize or deregulate the microfinance world.
Conclusion :
Complementary currencies existed before microfinance, but microfinance has developed much more rapidly than CC for what? Probably because the paradigm of money as the only mean of exchange is deeply enrooted, even in the developing countries were barter and informal trade were traditionally used. Providing money to those who need it through empowerment is what microfinance offers. Allowing local resources to be used among the community and avoid money to flow outside the community is the power of complementary currencies. Combining the inflow of money that microfinance provides with a better control of the outflow and an increase in the velocity of the exchanges is exactly the reason why microfinance and complementary currencies could work together, have a potential for poverty alleviation through more exchanges and the mobilization of local resources.
However, the acceptation and use of a new mean of exchange is not obvious, neither for the people nor for the issuer. Indeed, several legal limits can be faced, as well as people or MFI reluctance, nevertheless, as soon as the potential of this tool is understood, the effects can prove to be successful, and that's what Brazil is beginning to be aware of. Very few existing organizations like Social Trade Organization (STROHALM ), already work and promote new approaches of monetary exchange system for developing countries. Indeed STO developed a software called CYCLOS with which it is possible to create and pilot a new currency and which allows also to manage microloans. The tools and the concept of complementary currencies exist, microfinance is growing fast and only waits for people to implement pilot projects in order to see if the theoretical match between microfinance and complementary currencies happen to be truly efficient on the field in the developing countries or if this partnership is only illusory and can't work with poor people. Big questions remain unanswered for now : how exactly integrate CC in microfinance? Could it be the future of microfinance or will it be offered as one of the microfinance plus tool? These questions haven't been studied yet and need deeper analysis involving legal, sociological and economical aspects.
