Local First Community Interest Company was established in 2011 by Professor Richard Werner and other interested members of the public in Winchester, to restore banking to the service of local communities.
With Local First CIC, Professor Werner and his team of researchers, many of whom started as his Masters and Doctoral students, studied the differences in the banking systems of many countries. They identified a particularly successful type of banking sector structure, one that helps create the largest benefits for local economies and their communities: this was a structure with many local banks at its heart, contributing to their communities in many different ways. Out of the different legal and institutional settings in other countries, Professor Werner took the most advantageous features to design a template for the UK. This is the Community Bank model which we are now working to establish.
Community Banks provide the financial support needed by the successful entrepreneurs who create and develop small and medium-sized companies. These are the lifeblood of our local economies. They convert loans from banks into sustainable growth, prosperity and jobs. A virtuous cycle of growth is formed when a local, business-orientated bank provides services which are based on relationships and focused on the customer. Economies dominated by Community Banks are more stable and less prone to boom and bust cycles and banking crises.
Key Features of Community Banks
Community Banks provide loans to small and medium-sized companies, the sector of less appeal to big banks. The support big banks provide for big companies is an important part of the financial ecosystem; but for small enterprises to thrive, a healthy small bank sector is also needed
Rooted in the community
As used to happen, Community Banks take the time to get to know their local businesses at a personal level, which is usually a better way to assess risks and viability than the algorithms used by big banks. Every business is different, and the risks that entrepreneurs take are different. Community Banks have the capacity to account for this, and to manage their loan books with sensitivity to their customers.
Community Banks are focused on their local geographical area and on understanding the profiles of local businesses and where they fit into their respective supply chains. They are closer to local issues and the factors which can impact business, both in terms of challenges and opportunities.
Only small organisations embedded within their communities are accountable to their stakeholders in a meaningful way. Organisations that get very large can end up being opaque and unaccountable – and that’s when things often go badly wrong. Community Banks are closely engaged with their local stakeholders and their activities are transparent, visible and easily understood. True accountability exists, ensuring delivery of better banking services.
Range of services
Community Banks can offer the same suite of services as the big banks, but tailored to their customers. Their incentive structure measures the success of their customers. They do not have commission-based “product sales” targets or arbitrary percentage bonuses. On the contrary, services are offered on the basis of customers’ best interests.
Running big banks is costly, with major network and infrastructure costs. Community Banks can focus their expenditure on supporting the relationship managers who know their customers and look after the interests of their customers. Their local knowledge helps them to assess the risks of lending, contributing to a virtuous cycle of sustainability.
Community Banks are structured and managed for long-term sustainability rather than short-term profits. Lending to small and medium-sized businesses is inherently risky and often requires patience. The instinctive conservatism of the Community Banks is combined with their ability to take modest calculated risks on the basis of detailed local knowledge.
The 2008 financial crisis demonstrated practically what was known to network systems researchers: a decentralised banking system consisting of many small local banks lending mainly for business investment in local small firms is far more resilient and stable during a banking crisis. Indeed, Community Banks in Germany have never been the source of a banking crisis. They never lost money for their stakeholders and depositors, nor have they ever used public funds for bail-outs.
Community Banks aim to be profitable as well as stable. Unlike most other banks, the majority shareholdings of Community Banks are owned by charitable foundations for the benefit of the people in their local geographical area. This way they can channel profits back to the people of the local community, enabling them to support youth activities, sports clubs, education, charities and the arts and theatre, as well as a range of community groups. The ownership structure is also a crucial defence against takeovers: all other “challenger” banks are being created by profit-oriented shareholders who will not turn down an attractive offer by the incumbent banks. Such take-overs by larger competitors has been the experience of UK banking in the past 150 years, rendering it one of the most concentrated banking systems in the world.
The German Experience
Community Banks in the United Kingdom have a successful model to follow. Germany’s thriving small and medium-sized enterprise sector has produced strong growth, stable employment and prosperity for the majority of the population, not just a small elite.
At the heart of this 200-year success story has been the success story of its Community Banks. Today about 70% of bank deposits in Germany are with the Community Banks (local public savings banks, co-operative banks, over 400 Sparkassen, and over 1000 Volksbanken and Raiffeisen Banks). They account for 80% of all banks, and almost all of the small and medium-sized business lending. They have been successful and profitable, despite not aiming at short-term profits for shareholders and not paying large bonuses to their bankers.
They do not use tax-free offshore structures, but contribute to the country via substantial tax payments. And they also give back directly: in recent years the Sparkassen local public savings banks of Germany have given over half a billion euros a year in charitable donations to their local communities.
The UK banking sector
By international comparison, the UK banking sector is highly concentrated, with the top five banks accounting for over 90% of deposits. The problem of high concentration and lack of meaningful competition has been recognised over the past century by numerous banking commissions and official government reports, yet until now no solution had been found. Our solution is to introduce a different model of banking, with banks that operate differently and are dedicated to the local community.
Local First’s challenger model is being implemented initially with the Hampshire Community Bank, based in Winchester. All deposits will be retained exclusively for lending within the County, and the profits will be ploughed back into the local community.
We are talking to other communities about our subsequent targets for implementation of this Community Bank model. Please contact us if you would like us to come and talk to you about the potential in your community.
- Numerous local and regional banks supported UK businesses during the Industrial Revolution. But these were gradually subsumed into the monolithic entities which dominate banking services in the UK today.
- Germany’s ‘Sparkasse’ chain of community banks and Volksbank co-operative banks were the only German types of banks to grow their balance sheets during the post-2008 financial crisis, providing ongoing support to Germany’s small and medium-sized enterprises (the ‘Mittelstand’ family firms which are the backbone of the economy).
- The strong US economy has also been underpinned by thousands of community and local banks.
- ‘Cambridge and Counties’, a new UK challenger bank, has already exceeded its growth targets and has spread its operations from Cambridgeshire into neighbouring counties.