Society is the guarantee

The Chris Cook Economics 3.0 column

The concept of a Guarantee Society is not a new one. The AECM, which was founded in 1992, now links together Guarantee Societies in 18 European countries.

The Guarantee Society concept is a very simple one: it is for members of an association to link together to provide a mutual guarantee of obligations. In the case of the AECM this specifically means guarantees of interest-bearing loans from banks.

Anyone familiar with the work in the field of micro-credit of Dr Muhammad Yunus, of Grameen Bank in Bangladesh, will know that one of the key factors in its success was the way in which micro-loans are supported by the guarantees (and support) of small circles of friends and relatives.

Extending the Circle
In 2004/5 I worked with Scottish Liberal Democrats to extend the concept of the Guarantee Society in a new direction, and they adopted the concept as policy for a while, but it was never publicised. Presumably it frightened the horses: certainly it has been quietly dispatched to policy limbo.

Local authorities in the UK and throughout Europe have increasing problems in enabling small local businesses to engage with them. For sound risk management reasons, they prefer to engage with major businesses with a substantial balance sheet. Unfortunately the result is frequently that outside sub-contractors are brought in, often from abroad. Moreover, those local businesses which are sub-contractors are squeezed at best, and at worst simply robbed of their profit through what is charmingly known as “subbie-bashing”, through late payment, trumped-up disputes and so on.

The policy proposal was simply for local businesses to link together in a Guarantee Society and to back a mutual guarantee with provisions made into a default pool/fund; an insurance bond, or a combination. It would also be possible for Guarantee Societies to be set up on a functional basis – for instance, such as by plumbers, electricians, or by IT workers, and there are interesting possibilities here for a new approach to 21st Century guilds and trade associations.

So if a local Council tenders for a project, it would be possible for ad hoc consortia to come together to apply for the project, backed by their membership of one or more Guarantee Societies. In the event that work is inadequate or a consortium member drops out, then the necessary resources to secure performance will come from the default pool. It would also be possible to build in simple two tier dispute resolution procedures such as a referee and arbitration, to head off the expense of court cases.

Such consortia may even be able to undercut the major contractors, since they will in all probability not have any requirement to pay returns to unproductive external rentier shareholders.

Direct Credit
Conventional Guarantee Societies are already finding that even with collective guarantees, the shortage of bank capital, and the poor financial condition of many businesses are now combining into a fairly pervasive credit drought for small businesses.

With a little help from Innovation Norway, the Nordic Enterprise Trust, with whom I have been working, has therefore extended the concept of the Guarantee Society more widely still.

Firstly, it is possible for a Guarantee Society to provide a mutual guarantee of bi-lateral trade credit between its members, where sellers provide goods and services to buyers with “time to pay”. The mutual guarantee of credit would be supported by a provision made by both sellers and buyers into a default pool held by a custodian. A service charge would also be made for the services of a system provider/risk manager, and this would have at least an element of performance-related fee.

This trade credit will then be settled in pounds, or in pound’s-worth of goods and services priced by reference to sterling. Those familiar with the Swiss WIR will know that such credit clearing among businesses has been routinely in operation in Switzerland since 1934. Billions of Swiss Francs’ worth of goods and services change hands within the WIR, not for Swiss Francs, but priced by reference to Swiss Francs.

A service provider (formerly known as a bank) will allocate guarantee limits, manage the accounting system, handle defaults and so on. The beauty for the bank is that they are putting no capital at risk by creating credit themselves, and need only enough working capital to handle day today operations.

Guaranteeing Society
Looking beyond businesses, there is no reason at all why Guarantee Society membership should not also be extended to individual non-business members, to whom credit may be extended, but who would not themselves be extending credit.

What this would mean is that local businesses would be able to collectively extend credit to local citizens, thereby stimulating local economic activity which is currently being strangled by the absence of bank credit and the dominance of major chains such as Tesco.

The outcome could be of interest-free – but not cost-free – local credit cards backed by the mutual guarantee of all participating local businesses and all participating local citizens. Customers would pay a service charge, and also a provision into the collectively owned default pool.

Clearly, the participation of local authorities is key to successful implementation of such a policy, and the Nordic Enterprise Trust and a Bank partner are aiming to work with a Norwegian municipality to introduce the concept.

Perhaps one of the most attractive aspects of the Guarantee Society as a policy is that no legislation is necessary. Any businesses or individuals with a common bond could set one up tomorrow simply by mutual agreement. With support and facilitation from local government, of course, the policy may perhaps be rolled out more quickly.