Brazil slum a beacon for economic independence

FORTALEZA, Brazil (Reuters) - At a time when big financial firms are reviled by many for leading the world into crisis, a ramshackle bank on a potholed street has lessons in economic independence that are catching on around the world.

Small business owner Moeme Alves de Souza receives a loan of 100 palmas at the Banco Palmas in the Palmeiras slum in Fortaleza April 23, 2009. REUTERS/Stuard Grudgings

With its own money, the palma, that is trusted and heavily used, many of the 32,000 residents of the Palmeiras slum in the northeastern Brazil city of Fortaleza go days without seeing or using Brazil’s national currency.

Backed by the community bank that hands out zero-interest loans in the currency, the 11-year old palma is accepted by businesses throughout the area, whose residents credit it with transforming the local economy. It has spawned more than 30 linked community banks from the Amazon region to southeastern Espirito Santo state, up from just two in 2005.

And lately, Palmeiras residents say, the palma has shielded them from the crisis fallout spreading through Latin America’s biggest economy, where millions of poor struggled to get access to credit even before the financial turmoil struck.

“The palma has helped people get over this crisis, the loans have helped give people continuity,” said Joan Perreira de Souza, the 46-year-old owner of a local supermarket that has expanded in recent years thanks to loans made in palmas.

“It’s not total protection but it is very significant.”

Experiments in local currencies and trading schemes, whose backers say they work by keeping wealth within a community and strengthening local ties, have been around for decades.

But the crisis has sparked a new wave of interest in such models as communities, including in the United States and Europe, seek to insulate themselves from the credit crunch.

“I think it’s like a backstop -- if everything falls down, what would we be left with,” said Mary Fees, secretary of Britain’s LETS LINK UK network of local exchange trading systems. She said there had been a surge in interest from Britons in recent months, including from those who had lost their jobs and were seeking another way to sell their skills.

Crisis-hit communities across the United States are creating or reviving their own currencies -- from the “plenty” in Pittsboro, North Carolina, to the “cheers” that is accepted by some businesses in depressed Detroit -- in a throwback to currencies known as “scrip” used during the Great Depression.

The benefits of local currencies could be more psychological than economic, some sceptical economists say.

Tim Harford, author of the “The Undercover Economist” book that explains the economics behind everyday life, said any extra money spent on local goods instead of “imports” would likely be canceled out by the fall in spending on community goods by outsiders.

“If it makes people feel good, makes them think about local products, that’s great,” he said. “I just wonder if the energy it takes to set up could be used for other local projects.”


Yet the Palmeiras slum, which was formed by residents of an uprooted fishing community in the 1970s, appears to be a model of success.

It was impossible to find skeptics on a recent day as customers lined up at the bank’s three cashier stands to take out palma loans and make deposits.

As in most other such systems, the palma has a value at parity with the national currency but can only be used within a certain area. Local retailers offer a 5 percent discount for purchases in palmas and say that about 30 percent of their sales are now made in the currency.

“We found the reason we are poor is not because we don’t have money, but that we were losing our money. For everything we wanted to buy, money was going outside of the neighborhood,” said Joaquin de Mello, the bank’s general manager.

“The crisis has shown that big, all-powerful banks without social control don’t work because they exclude a lot of people who don’t have access to banks.”

That is especially true in Brazil due to double-digit interest rates and a lack of bank branches in poor areas such as the northeast and the vast Amazon region.

Brazil had less than one bank branch per 8,000 people in 2007, fewer than in the 1980s, the government’s Institute of Applied Economic Research said in a study released in April.

Since the crisis arrived late last year, credit offers made by the Palmas Bank have risen 15 percent as residents lost their jobs or were cut off by traditional banks, De Mello said.

A decade ago, residents had to leave Palmeiras just to get a haircut because of a lack of local businesses. But the combination of a local currency and available credit has helped hundreds of small businesses get started, they said.

“People outside don’t have the same luck we do,” said Moeme Alves de Souza, a 53-year-old who runs a corner bar with her sick husband, after counting out her latest 100 palmas loan.

She uses palmas loans to fund her local shopping, while a loan from the bank in the national currency has helped her son expand his tire-fixing business next to the bar.

Stores throughout the community sell locally made products such as detergents with the Banco Palmas brand. Local production keeps youths out of trouble and helps her business by improving security, said supermarket owner de Souza.

The enthusiastic De Mello has an ambitious target of 1,000 community banks in Brazil by the end of 2010. “There is enormous demand,” he said.

His advice for Wall Street? Go local.

“The crisis is producing an error because banks are joining together,” he said. “The lesson of crisis is that you have to decentralize and get closer to the people. The more you merge the more you discriminate and reject.” (Editing by Philip Barbara)