Salomón Raydán has created an alternative banking and credit system in which low-income citizens, both invest and borrow from communal banks by creating 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 from outside sources. Salomon’s groups are owned by community members and are self-managed. The capital that is used belongs to the same community, there are no external funds of any institution.
The members of the group are, at the same time, owners and clients. They are owner-investors because they form their capital by buying shares, but at the same time, they are the clients of the Bankomunal because they are the borrowers of loans.
In this way, a self-managed model is created where the interests as an owner must be adjusted to the interests as a client.
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.
Salomon organizes the Bankomunales into a network of many groups that allows to generate what he calls "a local development platform". This platform generates a critical mass of people that allows Salomon organization, to develop what he has called “his second generation of innovation”: Club BK
This is a new idea that is born from the fact that Salomon understood after several years, that educating and financially including the population is not enough. He discovered that the population he serves, spends close to 30% of their income on goods and services that do not add value to their economies. That's why, since 2016, Salomon is promoting The BK Club. This is a model to open up new spaces for families to re-direct their budgets in order to access what he calls “Buffers against poverty”
Access is achieved by generating a package of products and services that can be purchased by community members, paying a monthly subscription, which not only allows access to products and services relevant to families, but facilitates the sustainability to the organization of Salomon and he is also developing additional financial services, including insurance to pay off loans in the event of death and health insurance.
Poverty is not defined only by the lack of money, but above all the irregularity of income. People need mechanisms that allow them to access capital when they need it and mechanisms to save when they have surplus. Both instruments are required: Adequate mechanisms to access capital when there are needs and ways to save when there are surpluses
The poor, like any other person, have times when they need capital and times when they have capital surpluses, but micro credit has generalized the idea that people basically need loans in order to get out of poverty.
Traditional banking has proven that it is not the appropriate mechanism for poor people to save because it is not well adapted to the income and expenditure flows of poor families, nor does it take into account the cultural and emotional needs that generate savings among this population. For people to save, they need to develop instruments that truly adapt to their needs.
Microfinance had suggested that the only way to access quality financial services was through formal institutions, In front of the huge problem of accessing financial services, both savings and credit, was traditionally planted through micro credit and formal banking.
In order to poor people save and have access to credit, the old belief that the poor had nothing and that therefore had to be given credit was challenged. Many of poors financial needs, do not require external sources of money. In many cases they can, with their money, finance themselves.
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.
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 saving and 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 two months on the basic operations of a bank, which includes such tasks as writing receipts, negotiating funds, and determining interest rates.
After some time, depending on the characteristics of the group, 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 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.
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 very low. 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 have been connected in networks within specific territorial spaces, such as a city or a municipality, to create a critical mass of consumers to whom products and services that contribute to improving their living conditions can be offered.
The idea now is to use the Bankomunales not only as financial organizations, but also as a way to organize the demand, to generate in partnership with public and private companies, an offer of products and services that contribute to reducing the economic volatility of families.
Under the concept of "buffers against poverty", Salomon seeks to create spaces for families to redirect part of family spending. It is about generating a sufficiently attractive offer for companies in the areas of education, health, insurance, housing and recreation, to design an offer that is attractive and appropriate to the population.
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. 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 Master’s degree in 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.
While testing what he learned in Central America, he saw that some of the indigenous women near his farm had an informal financial mechanism to access credit. They all put in a monthly amount of money that one of the women would take as a loan. Women met every month to put a fixed amount and one of the ladies would take all the money.
This mechanism fascinated Salomon and he began to study it deeply. Soon he realized that it was not only done in that community, but in many communities in the country and not only in Venezuela, but throughout the world. Under different names, that mechanism was universal.
What struck him most was that, contrary to what was expected, the supposedly poor people had some money, so much, that they were able to put an important amount every month to be used by another member of the group as a loan.
"The poor are not so poor" he thought. He understood that using people's own money, a financial mechanism could be developed, although informal, to allowed people to save and borrow.
He soon realized that this global informal mechanism was poorly designed and could be improved.
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 Margarita Island, particularly for the fishermen there, were they operate for a number of years.
Salomon now lives in Colombia, and is replicating his model in seven Latin American Countries: Colombia, Venezuela, Argentina, Haiti, Dominican Republic, Bolivia and doing small pilots projects in two Prisons of Peru and one in Paraguay. In Colombia where he has created over 350 Groups, Salomon is also trying his second generation of innovation: the BL Club.