SALOMóN RAYDAN

Venezuela,

Salomón is working with SIE Fellow Jean Claude Rodríguez-Ferrera to create banks that pool community resources to provide for local financing needs. Having established self-funded communities in 7 countries, Fundefir aims to expand to 15 countries by 2013.

This profile below was prepared when Salomón Raydan was elected to the Ashoka Fellowship in 2000.

INTRODUCTION

Salomón Raydán has created an alternative banking and credit system in which low-income citizens both invest in and borrow from communal banks by drawing corporate banks into a network that offers more advanced financial services.




THE NEW IDEA

Microcredit is not a new phenomenon, but Salomón's methods are. In the traditional model, loans are granted to low-income individuals organized into borrowing circles, in which accountability is assured by group responsibility–if one member does not repay her loan, the entire group is held responsible for its repayment. In Salomón's model, in contrast, accountability is ensured because the funds from which community members borrow are their own.

In more traditional models, the capital and the rules for borrowing come from outside institutions. In Salomón's communal banking model, members supply the capital for loans and set their own lending rules according the best interests of the community.

Salomón links the various community banks into a network, which allows growth and promotes the idea more broadly. The network promotes transactions between banks and permits funding and services from external sources and corporate banks. Salomón is also developing additional financial services, including insurance to pay off loans in the event of death and health insurance.




THE PROBLEM

As is the case in most countries, Venezuela's poor have few, if any, opportunities to access savings and credit services. Credit programs run by the government, the primary source of credit to the poor, are not effective and tend to represent the state's interests more than those of the beneficiaries. The typical result of public lending programs is that the beneficiary's new business fails for lack of knowledge with regard to that particular enterprise, and the borrower is unable to repay. This repeated failure of government-sponsored microcredit programs has generated a belief that it is not feasible to lend to the poor, stigmatizing them as bad debtors, incapable of repaying loans. Although some civil society organizations are also working with microcredit in a somewhat more effective manner than the government, they still are not reaching the majority of Venezuela's poor population.

From a microcredit standpoint, while 80 percent of Venezuela's economically active population qualifies for loans, the rest of the population has no formal place to turn for their credit needs. According to Venezuela's Central Office on Statistics and Information, the national rate of unemployment is 20 percent and 60 percent of the population is considered to under-employed. These poor citizens have little ability to save and do not have resources available for such basic needs as emergencies. In cases in which a small loan could pull a family through a crisis, there is rarely immediate credit available so the family has to turn to loan sharks, whose loans carry up to a 200 percent annual interest rate.




THE STRATEGY

Salomón's community banks, or Bankomunales, are designed on a new savings and credit model by which community members provide the capital for their own loans through the purchase of shares, on which they earn returns. The banks are managed by the shareholding community members. These members determine interest rates, time periods for loan repayment, maximum loan amounts, repercussions for late payments, and all other standards for the banks' operations. As a bank matures, the members have the option of soliciting outside funds, using their own capital as a guarantee. Outside funds, however, are never to amount to greater than 50 percent of the bank's funds, so that the control always remains in the hands of the communities themselves.

The organization of communities into Bankomunales not only addresses their financial needs but also establishes an organizational framework and a sense of competence, which facilitate both community organization in general as well as personal accomplishment.In order to start up a new Bankomunal, Salomón first investigates a particular community's needs and potential to succeed. He works with established organizations like community groups and churches to identify best candidates for the lending program, to whom he communicates a sense of property through the process–that everything put into the bank already belongs to them. Local banking committees are trained in the basics of the model and elect officials. The community members also determine the rules for the bank: share prices, distribution schedules, interest rates, lending criteria, and conflict resolution procedures. Bank officials receive technical training for approximately four months on the basic operations of a bank, which includes such tasks as writing receipts, negotiating funds, and determining interest rates.

After six months, with approximately fifty members and an investment of about $1,500, Salomón allows the bank to operate on its own. In addition to the continuing role of the various bank officials, all shareholders are required to attend an assembly on a monthly basis. On average, the banks have been charging a monthly interest rate of between 4 and 5 percent, which is significantly lower than loan sharks' rates. Though individual dividends have not been large, holding shares in the bank has clearly lowered the overall real interest rate for borrowers. Currently, the maximum loan stands at $500. Banks also have a special line of emergency credit for accidents and medical situations.

Borrowers use credit for various short-term needs. Twenty-five percent of the loans are for medical emergencies, but others have used the credit as a down payment on their house or as start-up capital for a small business. Loan defaults are nearly nonexistent and the rate of late payments is less than 0.8 percent. Moreover, approximately 85 percent of all earnings are reinvested in the banks through the purchase of additional shares, promoting savings where there previously had been none.The Bankomunales are being connected in a network to provide services to one another and to negotiate with traditional banks on access to higher rates of credit and new resources, such as credit cards. In addition, the community bank network will provide financial services of which the individual banks are not capable, such as coverage of loan payments in the event of death and health insurance.




THE PERSON

Salomón grew up in a town dominated by the petroleum industry, where indigenous residents were treated as inferiors. His father worked in social organizations fighting for indigenous rights and Salomón later became involved in movements to promote bilingual and cultural education. His mother was a housewife who ran her own small clothing business from the home. Her contributions to maintaining the family through the earnings generated from her own microenterprise awakened Salomon to the significance of home-based economic activities.

Salomón studied philosophy and became involved in political and social movements. He earned his Masters degree in Latin American studies and political sociology at the London School of Economics, after which he taught at a university program in England. He later returned to Venezuela and began working with a government-led microcredit program for farmers. However, he identified major inefficiencies in their models and returned to work on his family's farm. In this capacity, he became involved with other farmers and was voted president of the Milk Producers Society in Anzoategui.

When business started to go bad as a result of the devaluation of Venezuelan currency, he decided to study the situation of indigenous groups living in petroleum-producing areas. He saw again the importance that credit had within these indigenous communities. During this time, he also became involved in a political movement that was trying to send a new candidate to Congress. Though the candidate lost the election, he was named President of the Agricultural Credit Fund, and Salomón accompanied him as his top advisor. Salomón's role within the organization was to study different models of credit in rural areas and to create a model that would be more effective. He saw great promise in Costa Rica's community lending programs, but still found disfavor and ineffectiveness in the reliance on outside financing sources.

Salomón formed the nonprofit organization Fundefir to test his Bankomunal concept in small, indigenous Venezuelan towns. As the model began to work successfully, he established a similar program in the state of Nueva Esparta, particularly for the fishermen there. Though he did not have funding for a broader project, he closed his business and moved to Margarita Island, where he continues to operate.