How interest-free banking works: The case of JAK

http://www.feasta.org/documents/review2/carrie2.htm

by tomp • 12 years ago

71 43 12 years ago

fsiefken4• 12 years ago

This seem similar to the prohibition of interest or fees for loans of money within Islam. Medieval chrisianity prohibited it as well. http://en.wikipedia.org/wiki/Usury

digitalengineer2• 12 years ago

"The fist loan was recorded in 1135. Interest was prohibited, so it was calculated beforehand and included in the total amount borrowed".

Funny how people always find ways around prohibition.

aruggirello• 12 years ago

The same applied to ancient Jews, I believe. Asking for interests for borrowed money was forbidden by the Laws of God. And then there was a Jubilee once every 7*7=49 years, when existing debts were condoned, and a man could return in possession of his house if he (or his parents) somehow had lost it. It was a system promoting mercy and hope even for those who lost everything, rather than creating oppression and exploiting the poor.

draugadrotten2• 12 years ago

And then there was a Jubilee once every 7*7=49 years

In modern Sweden, you are debt free in 5 years only, not seven, by invoking "skuldsanering".

Paraphrasing you, modern Sweden has a system promoting mercy and hope even for those who lost everything and the Jubilee law meant creating oppression and exploiting the poor.

BugBrother5• 12 years ago

So "interest is forbidden" was part of the old christian, muslim and jewish religions?

I've seen it argued that Islam's real problem is that they have too good sources -- it is harder for those followers to skip those of God's eternal commands which don't work in the modern world...

(The most important feature of a working religion -- selective amnesia when rewrit... reinterpreting it? :-) )

aw3c2• 12 years ago

It might be some fascist myth (and if so, I am sorry for spreading it, please educate me!) but wasn't one of the reasons for Jewism being condemned by many places that they took interest?

eli_gottlieb• 12 years ago

Jews were exploited by Christian rulers as financiers, in two ways:

* Jews were allowed to loan money to non-Jews, whom the Jewish legal system originally counted as "foreigners". (Please remember that these laws were written in a much more tribalistic and xenophobic age.)

* Laws were passed keeping Jews out of professions other than peddling and moneylending, thus ensuring a steady supply of Jewish lenders.

* If the ruling class didn't want to pay back a Jewish lender, they could just call him a Christ-killer, turn a mob against him, and run him out of town.

ahmed1490• 12 years ago

One way islam allows for making up for the depreciation of value is that you loan out gold instead of money.

And then the borrower has to return back same amount of gold irrespective of its value.

asadlionpk2• 12 years ago

Yes, I guess that also prevents insane levels of interest.

FBT• 12 years ago

The title is misleading, but subtly so: Interest is most definitely charged, just in a far more indirect method than most banks. To take a loan you are required to have kept a proportionate amount of money in the bank,without being paid interest on it either.

Therefore, they demand as their fee that you pay the opportunity cost of the interest you would have earned by keeping your money in another bank.

I don't really see the point. All banks do need to charge interest, true, but the least they can do is charge you it in a fair and straightforward manner. Normal banks charge you, but at least they are explicit about what they are charging you, whereas this one charges you in an abstruse way that you need training as an economist in order to understand fully.

galuggus• 12 years ago

It is true that you are losing money by having it tied up in an interest free account(+Inflation).

However I think the real interest rate for your loan is much lower in this type of bank. There is no profit.

Could anyone work out the exact rate.

P.s Most current accounts in U.K/Ireland pay abysmal rates of interest

draugadrotten2• 12 years ago

Could anyone work out the exact rate.

The true effective interest rate varies with time so the answer to your question would be a set of equations.

Professor Stefan Yard at Lund University in Sweden has made a calculation with a 10-year JAK loan, and compares it to borrowing money in a normal bank for 5 years and then saving money in the same bank for 5 years without interest (this is how a 10 year JAK loan work)

The effective interest rate of the JAK loan is then 6.5% which is higher than the normal bank.

Source: Use e.g Google translate to read http://www.jordensvanner.se/2012/gar-det-att-driva-bank-utan...

VLM2• 12 years ago

"There is no profit"

I unbanked many years ago (a decade now?) and the only practical local difference between a bank and my credit union is the CU is non profit and unsurprisingly the related fees and interest rates are microscopically more consumer friendly, and arguably less of a "screw the customer to earn your paycheck" attitude exists so in a fluffy and subjective manner customer service seems a lot better. Thats it. They still pay and charge interest, just better rates than a for profit bank, etc. No fooling around with a fake currency of "points".

I have no idea why any locals do business with a for profit bank, other than maybe some conspicuous consumption thing to prove the can afford to make the bank shareholders richer. "In the old days" CUs had strict membership requirements like "military veteran" or "holder of teachers license" (no kidding). My local CU membership requirement is "mailing address at time of account opening within same county as CU branch". That's it.

There are two interesting aspects of "points". Not being legal currency I imagine the tax implications are bizarre, probably more of a pain than bitcoins. And the article didn't touch on "points" being inheritable or taxable. So assuming old people live in apartments and forfeit their point collection at death, that is an income stream situation that was not discussed.

jordan0day• 12 years ago

You're not wrong, but how many people consider their opportunity cost in most money-related matters?

That is, every year around tax time (in the USA), I see several people trumpeting about how folks who get tax refunds did it wrong. "You should have taken a larger paycheck and put the surplus in an interest-bearing account!", they always exclaim. And they're right. People should have done that. But most people wouldn't have. A tax refund ends up being like an unseen piggy bank for a lot of people. They're not earning interest on that money, but at least they're saving it and not spending frivolously. Without that unseen piggy bank though, a lot of people wouldn't have the discipline to save that money.

rrrx3• 12 years ago

Sure, but plowing through life oblivious of something - in this case opportunity cost - doesn't mean that that thing doesn't exist.

mrow84• 12 years ago

Maybe I've misunderstood you, but you wouldn't in any sense "pay" to JAK the opportunity cost of putting your money in their bank, so it can't really be called a fee. Opportunity cost is a thing unearned, not a thing paid.

If they were using the deposits to make interest earning investments for profit then that would be a slightly different matter, but they are not, they are using it to make interest free loans.

The key point is that they do not make profit. They could do this at any interest level, from zero up, as long as their deposits balanced their loans. If they chose to make a profit then they would need an imbalance between the interest on their loans and the interest on their deposits, and then there would be a net interest charged. The other sources of interest are inflation and defaults, and from what I can work out they do make investments with some of the deposits, precisely to cover these liabilities.

scotty79• 12 years ago

I think the main point is to reduce the fraud.

lmm• 12 years ago

So they change (and pay) interest in "points" rather than cash. But it's still there, and it works the same way (e.g. you get higher interest on an account where you need to give notice of withdrawals than you do on an account where you can withdraw immediately). I guess this is a clever wheeze to extract money from savers - rather than paying them money you pay them points that they may not cash in immediately or at all - but I don't see the advantage for the user.

brianwawok2• 12 years ago

No taxes on your interest like at a normal bank.. but this is pretty small for most people especially with the current rates on savings and CDs.

joosters• 12 years ago

It's really a myth that banks fund their loans through the savings accounts of customers. The 'liquidity' section of the article is misleading. See the bank of England's explanation:

http://www.bankofengland.co.uk/publications/Documents/quarte...

retube• 12 years ago

Not necessarily. It depends on the institution. Some loans ARE made out of deposits. Those that aren't need to be funded in the money markets - you borrow from another financial institution to cover the amount lent out. Not sure the BoE paper makes that clear.

lifeofanalysis• 12 years ago

This is good because it solves a problem for small borrowers/lenders in a nice way, just like micro lending does, but this would not work for larger amounts. Over the last 10 years, inflation in the US has ranged from 1.5%-4%. So if you are putting a large amount into a zero interest (or, low interest) Savings account, you are basically losing money.

Unrelated side note: If you have any more than 3-months expenses in your Savings account, take them out and put them in a NASDAQ or S&P index fund with low fund expenses.

pktgen• 12 years ago

You can also get 5% APY in FDIC-insured accounts if you're willing to do a bit of work. Rewards checking accounts and prepaid card savings accounts (Mango is offering like 6% on up to $5k).

svantana• 12 years ago

JAK is actually misleading in their marketing, in reality you pay a "loan fee" which corresponds to 3-4.5%/year, which goes to salaries etc. The only real advantage to a "normal" bank is that this rate isn't (directly) market controlled.

How interest-free banking works: The case of JAK

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