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BACK TO BASICS WITH BUILDING SOCIETIES

One method of recycling an area's savings which has almost disappeared in the past hundred years is the local building society. In 1900, there were 2,286 building societies in the UK, almost all collecting savings and lending them out again within a limited area and thus reducing the amount of interest payments and capital which leaked out of the districts in which they operated. By the end of 1995, however, there were only 79 building societies left and the biggest seven of these had not only become so national (and in some cases international) in their operations but also, with the major banks, so dominant in the mortgage market, that only 14% of all house loans were still being provided by the 69 remaining building societies with strong local or regional roots. Many of these are expected to disappear too. Replying to a 1994 survey by a Union Bank of Switzerland analyst, John Wrigglesworth, 70% of building society chief executives said they thought most of the smaller local societies would have been absorbed by national ones by the end of the century.

Such a change is not inevitable as if enough well-motivated people in places which still have a local building society opened accounts they would be able to prevent its amalgamation no matter how big a bribe a national society offered members to secure their vote to take it over. But this would merely prevent further losses. Reversing the trend is likely to be much more difficult since the EU now requires new societies to have a capitalisation of a million Ecu (the British government gratuitously made more onerous by rounding it up to 1m), thus making it almost impossible for people in places which have lost their society to start a replacement. The days in which a building society could be dreamed up over drinks after an Ecology Party conference and launched by persuading ten people to invest 500 each - as the Ecology Building Society (EBS) was in 1981 - have gone. "That road seems closed" Bob Lowman, the present general manager of the EBS told me. "The government seems to be moving the goalposts all the time. Societies can do many more things these days but they are much more tightly regulated"

Two approaches might enable communities to get around this EU restriction, however. The simplest would be for an existing building society to accept an invitation from a community to set up a branch in their area on the basis that it would not move capital in or out of that area and restrict itself to granting mortgages using the area’s savings. Such a policy could become an attractive marketing strategy for an existing society once a reasonable number of people begin to accept the desirability of investing their savings in their own neighbourhood.

The other approach goes back to the origins of building societies themselves. The first society for which records exist was founded in the Golden Cross Inn in Birmingham in 1775 and was soon followed by others in the growing industrial towns of northern and middle England. These were all terminating societies, set up by working-class men who drank in the same pub (for the first 50 years of the movement, every single society was linked with a public house)15 to enable them all to be housed.

A self-build housing project at Gledhow Bank, Leeds, financed by the Ecology Building Society. The rear of the building will be covered with a turf roof.
Each of the 25 or 30 members undertook to pay a fixed monthly subscription and whenever the group had collected an agreed amount - a share, enough to build a house - it would be allocated to a member either by drawing lots or by competitive bidding, the successful bid going back into the kitty towards the next share. These societies actually built houses themselves and wound themselves up when everyone was housed - the last one being dissolved as recently as 1980. Originally, a member’s share was interest-free but as the pace at which shares became available was rather slow, some terminating societies began to borrow from non-members so that they could allocate shares faster. This enabled everyone in the society to be housed more quickly but meant that members had to pay extra subscriptions to meet the interest payable to non-members. This was worth doing, however, because members would otherwise have continued paying rent for much longer.

The main problem with the terminating societies was that a new member could not join after one had started unless he could afford to put in a lump sum equal to the amount the others had already subscribed. In 1845, the first permanent (i.e. non-terminating) building society was set up to overcome this drawback. It also allowed people not actually wanting to be housed to put their money on deposit and reclaim it whenever they wished, thus making their savings available to members needing housing rather more flexibly than with a terminating society.

In other words, the permanent societies were (and are) deposit-takers and deposit-taking is the activity that a society formed today would not be allowed to perform unless it had access to 1m. of capital. "But if a new society was proposing to take its members’ savings as shares rather than deposits, I would be able to register it under the Industrial and Provident Societies Act" says Malcolm Lynch. This would mean that anyone saving with the new society would only be able to get their money out after another member had been found to purchase their shares and not, as with the existing societies, on demand.

This would be a drawback but, even so, it means the way is open to launch a local building society which preserved the non-interest feature of the original terminating societies by operating on the following lines: each year, groups with twenty members each would be enrolled by the society, each member committing him or herself to saving by monthly instalments a twentieth of the cost of an average house in their area each year. If local house prices increased, the sum they would be obliged to save annually would be put up accordingly. At the end of its first year, each group would have collected enough for its first member to buy a house and a celebratory dinner could be held at which the house-sum was allocated by auction, the successful bidder being the person who offered to leave the highest proportion of the money in the pot to go towards the house-share for the next auction. The rules of the society would stipulate that successful bidders doubled their monthly payments once they were in their new house, thus giving the other members the benefit of the money he or she would save by no longer paying rent.

Ten or eleven months later, the price of a second house would become available and could be allocated in the same way. As time passed, the intervals between house-sums becoming available would become shorter and shorter and, depending on how big bids members were prepared to make in the house-sum auctions so they could buy their house sooner rather than later, the whole group could be housed within twelve to fifteen years. Subscriptions would then stop and the group would have become owner-occupiers at very much less cost than if they had had to take out conventional mortgages. The disadvantage of the system - that some members would have to wait over ten years for a house-sum - would be minimised if each group included a high proportion of people young enough not to want to move into a home of their own for several years..

The building society would not terminate when the first group or groups had been housed but continue to look after successive years’ groups of savers. For example, if a member who had not yet bought a house fell on hard times and was unable to save for a period, the society could arrange for him or her to leave their original group and join a later one instead. If a member needed to withdraw from the system because his or her circumstances had changed, the society would advertise their shares and transfer them to whoever offered the best price to take their place in the group to which they had belonged As the years passed, membership of a group would become increasingly valuable because the number of months between each house-sum coming up for auction would get shorter and shorter. Indeed, if the society’s rules allowed, members would be able recover most of their money by buying a house-sum at one of their group’s regular auctions and then paying off all the double subscriptions due until the group was scheduled to be wound up from the house-sum itself. Similarly, once a member had purchased a house, they would be able to recover their money by selling their house and paying their outstanding subscriptions in a lump sum from the proceeds of the sale. In short, techniques could be devised to ensure that a reasonable degree of flexibility was possible even though the society could not act as a deposit-taker.

Even ignoring the interest savings, it would be well worth the effort to launch such a society. Although it is national in its operations - at the end of 1995 it made its first loan in Northern Ireland - and has other objectives, such as allowing its members to restore derelict properties and thus save the materials and energy embodied in them - in one case at least the EBS has given an indication of the good a local society would be able to do. Some years ago the society made a number of loans to enable families to buy miners’ cottages in a village in East Cumbria which other societies would not touch. As a result, the school and the post office which had been under threat were able to stay open and the whole community was re-invigorated

Another approach to the provision of zero-interest housing loans has been developed by the Dutch non-governmental organisation Aktie Strohalm (Last Straw Action) for use in the South African townships although it could well be applicable elsewhere. The townships suffer, amongst other things, from a shortage of houses and an almost non-existent local economy. This means that most residents with jobs have to travel to work outside the township and unemployment within it is high.

Several international agencies have offered funds to build houses and Aktie Strohalm was asked to suggest a way in which their construction could be used to develop the townships’ internal economies because if the aid funds are spent on hiring a contractor in the conventional way, he will almost certainly be from outside the township and bring all the necessary materials and labour in. The township would get new houses but nothing more. Part of Aktie Strohalm’s suggestion, which involves using a township credit union to run the project, reads as follows. As this book went to press, however, it seemed unlikely that the idea would be taken up.

HOW AN INTEREST-FREE LOCAL CURRENCY MORTGAGE SYSTEM MIGHT WORK

The first step is that the credit union announces, with great fanfare, that it will make interest-free mortgages available to families wishing to purchase houses, shops or workshops on a development it is about to start. The announcement will add that the only people eligible for the new mortgages will be those who, by the time the first building units are finished: 1) have saved 10% (say) of the purchase price in special township tokens (TTs) which will be issued to pay the building contractor for his work. 2) are already resident in the township, and, 3) have a regular Rand savings account in credit with the credit union.

Contractors tendering for the first few units will be asked to price their bid in TTs and will be told that they can exchange the TTs at the credit union for 95% of their face value in Rands, if they so wish. However, if the publicity is successful, families wishing to qualify for an interest-free mortgage will be happy to buy the TTs from the builder at or above their face value in Rands. The public demand for them should also ensure that shops and building material suppliers will be prepared to accept them at face value in payment for goods and building materials and construction workers will consequently be able to accept them as wages. The credit union should be prepared to open special TT savings accounts, which would pay no interest but give depositors preference when the next batch of mortgages came to be issued. The credit union would never sell TTs for Rands, and would only accept repayment of the special mortgages in TTs, thus ensuring that there is a continuing demand for them.

If the exchange rate of TTs for Rands rises above parity, this is a signal that the credit union can get a contractor to begin another batch of houses and thus put more TTs into circulation. On the other hand, if significant amounts of TTs are being brought in for redemption in Rands, this would be a sign that too many TTs had been issued and further building contracts should be deferred. The aim of the programme should be to build as many houses as possible every year while at the same time keeping the TT's value at par with the Rand. The credit union should, of course, reserve the right to alter the amount of the deposit as a percentage of the purchase price of the properties it finances in order to control the system. It should also be prepared to finance old as well as new properties, at least when the system has become established, so distortions in the local property market are avoided.

Analytically, by holding the new money, township residents are making interest-free loans to the families which get the mortgages. Their motive for doing so would be that they - or members of their families - wanted to get interest-free loans themselves at some time in the future. Obviously, interest-free loans can be repaid more quickly than conventional mortgages.

The credit union would incur costs operating the system but in the early stages at least, each TT would be backed by a Rand provided by a donor agency and the credit union could earn interest on the backing funds by lending them out to its members or by depositing them in a commercial bank. Once the TT is well accepted, fractional backing will become possible and the donors' money will be able to finance houses worth several times its Rand amount. There is no reason why the TT should not reach the stage that it circulates in the township as commonly as the Rand, the only difference being that it would not be acceptable outside and would not attract interest if placed in a savings account.

There is no risk to the credit union in operating the scheme. The worst that can happen is that all the TTs are presented for conversion into Rands immediately they are paid out to the builder. In this case, the houses would be built and paid for just as if the experiment had never been tried.

Ecology Building Society, 18, Station Road, Cross Hills, Keighley, West Yorkshire BD20 5BR. Tel. +44 0845 6745566, fax 01535 635166, e-mail info@ecology.co.uk .

Aktie Strohalm, Oudegracht 42, 3511 AR Utrecht, the Netherlands, tel. 31-30-2314314, fax 31-30-2343986, e-mail info@strohalm.nl

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