What Brazil’s Community Banks Can Teach Us About Local Investment

In many democracies, growing wealth inequality is showing up as a destabilizing force. What happens when we shift a sole focus on individual prosperity and broaden our lens to community wealth? To walk us through what this shift looks like, Ashoka’s Asier Ansorena spoke with Ashoka Fellow Joaquim de Melo, founder of Banco Palmas, Brazil’s first community bank that opened its doors 25 years ago. He talks about how they pioneered an alternative currency to build and retain community wealth in Fortaleza, and how they have since grown into a national movement of 150 community banks, which mobilizes and redistributes 1.5 billion reais (nearly 300 million USD) yearly in local economies.

Asier Ansorena: Joaquim, you were living in the favelas in the northeast of Brazil, training to be a priest, when a question occurred to you that changed your life. Tell us about this question.

Joaquim de Melo: When I arrived in Conjunto Palmeiras in 1974, the military dictatorship had displaced the whole neighborhood. So we began by building schools, day-care centers, and local markets from scratch. But even after all that development, year by year, the neighborhood stayed very poor.

The turning point came when we asked, “Why?” Why weren’t we managing to consolidate wealth, with so many hardworking people, schools, a daycare center, and sanitation? And we realized that it was because all our money was leaving the neighborhood. We were giving it to big box stores and big banks instead of producing locally. We realized that the key to defeating poverty was to start investing in ourselves. And that was how Banco Palmas, our community bank, was born.

Ansorena: What is a community bank?

De Melo: It’s a non-profit bank that invests in the creation of local businesses and a local currency. We charge interest on loans at a very low rate, and any profit gets reinvested in more loans for local businesses. In short, Banco Palmas is a new economic circuit that takes the wealth we generate as a community and uses it to strengthen the local economy.

Ansorena: Why create a community bank when you can just request a local branch of a public bank?

De Melo: The big problem in Brazil is that the commercial banks suck up wealth like a vacuum cleaner, and I’ll tell you how. Initially, credit cards were seen as a resource in poor communities. When local companies went under and people weren’t able to get loans, they needed to buy on credit. However, because the banks charged very high interest rates, up to 20%, people became indebted as well as impoverished.

When you buy using a credit card, they charge merchants a 2-3% fee. Then they take that money and invest it in big corporations and affluent neighborhoods. Local merchants lose money, and the big corporations get richer. So why not have our own bank, where you lend at very low interest rates in order to reinvest locally?

Ansorena: This reminds me of the European financial crisis of 2008. The European Central Bank did not put money into people’s accounts or lend directly to governments. No, 800 billion euros went to private banks, and practically none of that money was invested in small and medium-sized enterprises that would have grown the local economies. Banks are meant to fulfill a social function, but they are not doing that, right?

De Melo: Right. That’s because most banks are pursuing increasingly large profits rather than focusing on building productive capital. A company that wants to go to the bank to take out a loan to produce clothes, shoes, food, can’t do it because the bank prefers to put money in the stock exchange.

The Brazilian Central Bank actually sued us twice, saying our community bank was illegal. My colleagues and I were arrested. We had to go to court to win the right to operate. In 2010, the Central Bank recognized that it had made a mistake and issued two technical notes to the country, saying that our bank was important for Brazil and improved lives.

Ansorena: How do the vast economic disparities in different regions of Brazil come into play? Reports show that private banks, including some public ones, regularly take the savings of poorer Northerners and reinvest in the affluent South.

De Melo: This is exactly what happens. But community banks are challenging their model. In 2022, community banks circulated billions of Reals. We had 1.5 billions reals (USD 300 million) in revenue, and that money was re-invested in production and distributed throughout 152 community banks, paying for everything from solar panels to loans for local businesses, like barbers or clothing stores. This is no longer a utopia; this is working.

Ansorena: Twenty-five years ago, you created the first tangible social currency, the Palmas, and now it’s gone digital. Tell us about that.

De Melo: We originally invented the Palmas currency to stimulate local spending. It was backed by Reals, so if a merchant wanted to, he or she could convert this social currency back into Reals for a small fee, which fed into the bank’s investment fund. Then in 2013, we converted to a digital platform, e-Dinheiro Social, which translates to Social e-Money.

What’s fundamental to our methodology is that each bank remains hyperlocal. Each community bank works in a territory or neighborhood. You download the app, search within your municipality, and if there is a bank there, you can register, make a transfer and start buying from merchants. But if you leave your municipality, your balance shuts down, because the currency is designed to stimulate a specific geographical area. The goal is to encourage you to buy local.

Starting around 2017, we’ve been hearing Brazilian mayors say, “Boy, the municipal economy is really developing, we are seeing much more prosperity.” So, some mayors have partnered with us, and, through municipal laws, mayors are creating community banks and social currencies. There are already ten municipalities in Brazil that have taken their money out of the big traditional banks and are creating social currencies, using our digital platform.

Ansorena: How do community banks empower people to become prosumers, i.e. people who both produce and consume to stimulate the local economy? What financial education is still needed in historically marginalized communities?

De Melo: The world tells poor people that they should feel lucky to buy products from big corporations, to be an employee, and to have a boss. The Community Bank offers another way forward: being an entrepreneur and a prosumer.

Financial education should teach people how to organize their finances, but also how to make money by producing, consuming and generating resources in their own community. Entrepreneurship is a good thing. As long as people get it into their heads that it should be done in service of the collective. Don’t think about it from an individualist perspective.

Ansorena: As a playwright, you also use theater as a vector of financial education. Why is culture so important?

De Melo: All change, all collective consensus, comes from culture. At Palmeiras, we do puppet theater, dance, photography, comics, and community radio to educate people about the local economy. Culture is also what fuels our mission: eating, socializing, dancing, beer, and pagode music. It’s that local culture that inspires me.

Ansorena: This move towards a different economic culture isn’t just an objective of Community Banks or a Brazilian issue, is it?

De Melo: Thankfully, it’s an objective shared by many across Brazil and the world who are building new economic alternatives – be they leaders of the solidarity economy, the green economy, the circular economy, community banking and more. Just last week I was in Brasilia for the launch of a new national initiative: the National Strategic Committee for the Impact Economy. Our mission is to bring all those movements together to coordinate national actions and new public policies with leaders from business, civil society and government. I met with Muhammad Yunus there, the Bangladeshi Nobel Peace Prize winner, and global architect for micro-credit. He stressed the importance of building a new global economic model and praised Brazil for its leadership. We have a unique opportunity to build this future.

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