In today’s world the most fundamental socio-economic problem is the inequitable ownership of capital assets that, in turn, is one of the fundamental causes of income inequality among people.
Almost in every society and nation, only few own capital assets, – assets that are used for production purposes (such as land, machinery, raw materials, commercial and industrial buildings and other related structures, infrastructures such as roads and highways, gas, water, and electricity etc., and other logistic support). These few earn profits by using these assets to produce goods and services in various sectors, while the larger segment of the population must, and supposed to, work for them as labors and staff in exchange of wage and salary. The present-day world economy is based on a banking system that is largely responsible for this undesirable situation.
Now, the question is: is there any way to make ownership of capital assets available to the larger population possible with opportunities to earn profits on regular basis from their operations? Is it possible to device a method that would make room for a change, as such?
Cooperative Businesses: A New Economic Order
A new economic order with provisions for social ownership of the means of production (to wit, capital assets) could, possibly, be created through the establishment of cooperatives of the kind that I am now about to give an outline of. People would become members of the cooperative by depositing their money in it. A “Panel of Professionals”, specialized in the field of investment, would invest the members’ money (i.e., deposits) in ventures of various types (for instance, agricultural, industrial, or service related) and sizes (small, medium, and large enterprises) under the direct authority, guidance, and control of a “Managing Committee”. The “Managing Committee” would also run the cooperative’s day to day affairs.
The membership into the cooperative would be open to all, regardless their position in society and their social status. Anyone can be a member of the cooperative by depositing no less than taka 1,00,000. Once an individual becomes a member of the cooperative, he/she would be one of its owners with voting and other rights in managerial and administrative decision-making process of the organization.
An individual entrepreneur or a sponsor or a group of entrepreneurs or sponsors would initiate the formation of the cooperative with the aim of implementing a venture project (i.e., a unique Business Plan). They may also decide to take assistance of an investment professional or a group of investment professionals with the aim to select the right kind of project with the maximum profit potentials, and prepare the best possible financial planning.
After having the cooperative duly registered under a specific and specified name, the individual entrepreneur/sponsor or the group of entrepreneurs/sponsors would form a Reserve Fund. The Fund would be treated as their investments in the project, and they are to be deemed as the “primary members” of the cooperative. The size of the Reserve Fund, formed by the deposits of the primary members, should and must be 30 percent of the total fund required for the project.
These primary members would be responsible for inviting applications for secondary memberships of the cooperative through public notification. The total number of secondary members of the cooperative is to be circumscribed by 70 percent of the fund required for the project. Both the primary and the secondary members of the cooperative would draw profits on their deposited amount at a flat rate (for instance, @ 10 percent) at regular intervals (preferably, at the end of each quarter); they would share losses on their investments as well at the same flat rate.
Suppose that there are fifty (50) cooperatives as such, each having one thousand members (inclusive of both primary and the secondary members) and operating one business enterprise in a growth sector. This would amount to an assortment of fifty thousand (50,000) small, medium, and large investors that are involved in 50 businesses of various size (large, medium, and small; and, preferably, all in the growth sectors), and drawing profits thereon at regular interval.
Both the primary and the secondary members, working together as a unit, should and must form and establish the cooperative in its entirety. In case the members lack adequate knowledge, experience and expertise regarding how to handle and manage investment projects, they may decide to recruit highly skilled management professionals to run the cooperative business. These management professionals do not have to be highly qualified or experienced, and would be regarded as staff members of the “Managing Committee”.
The primary members of the cooperative would form the Managing Committee. Forty (40) percent of the members of the Cooperative’s Managing Committee would be its (the Cooperative’s) secondary members, elected by the secondary members from among them as their representatives in the Committee.
Primary as well as the secondary members (i.e., depositors) would be regarded as the owners of the cooperative; anyone can be its owner by depositing no less than Tk 10,000. The overall management of the cooperative would be vested with the owners. They would formulate the cooperative’s policies and provide guideline for its day-to-day business operation.
Cooperative Business Model in Light of Present-day Banking System
Present-day interest-based banking system has contributed to increased and ever-increasing income inequality and inequitable distribution of wealth in the society. Under this system, a group or class of people owns the majority share of wealth and generates most of the income of a society. For, under this banking system they are the ones who primarily owns the means of production of goods and services; and majority of the people within the society are forced to work for them. Only a tiny portion of their income they share with the populace, who work for them as labors and staff.
These owners of capital assets use the rest of their income, legal and illegal, for their enjoyment that, in turn, makes their money circulate within a specific class or group of people. Who are these people? They represent the rich and the privileged section of the society; people who avail the bank loan very easily, just because they are rich, privileged, and influential. And through these easy-coming bank loans they own the majority share of the means of production.
Well, cooperatives such as has been outlined in this article can possibly change all these. Establishing cooperatives such as these would reduce income inequality and contribute towards more equitable distribution of wealth in society, as they offer an inclusive business model that makes room for participation of people from the larger segment of the society in the process of ownership of capital assets (i.e., the means of producing goods and services). In consequence, money would circulate over and across various groups and classes of people within the society; this would, in turn, increase income and create new employment opportunities for people within the larger segment of the society. Formation of business cooperatives such as these would also enhance creativity and entrepreneurship ability of the populace.
Interest on bank loan is a huge cost to any company, especially for the big businesses in which significant amount of short- and long-term bank loans have been invested. These big businesses must pay interests on their long- and short-term loans at regular intervals, which weighs heavily on their financial performance; besides, they must pay back the loan amount in phases. Interest payments on bank loans and repayment of loan amounts results in huge costs for these businesses; this means less profits than what it should have been without these costs. In the process, business entities with weak financial conditions run the risk of becoming loss-making concerns. The burden of interest payments on bank loan and repayments of loan amount over a period eventually paves the way to insolvency for many business enterprises.
As a loss-making company asks for more loan from its lending bank, the bank may decide in favor of the former to put more of their depositors’ money into the loss-making business enterprise. In this way the bank depositors, in numerous cases, take the burden of losses of these companies on their shoulders and bail them out, quite unknowingly; on the other hand, the bank depositors never get any share of profits of these business entities. So, in either way, under the present-day banking system the owners of the borrowing companies are the ultimate beneficiaries of the system.
Interest Costs are added to the Prices of Product and services
Companies treat interest payments on bank loans as fixed costs, and pass the ultimate burden of such costs on their customers by adding it to the prices of product and services they produce; this makes prices of various product and services much higher than what these prices would be in the absence of any interest costs in the financial records (i.e., accounts) of the companies. Thereby, prices of product and services of companies, formed under the ‘Cooperative Business Model’, would be much lower as compared to the prices of the similar product and services of other companies that have been formed with the bank loan. However, there would not be any noticeable decrease in the overall prices of various product and services if the present-day banking system is not replaced by the ‘Cooperative Business Model’; if that happens, people would get various product and services at prices that would be much lower than what these prices presently are; in consequence, the General Price Index would be much smaller than before and people’s purchasing power would increase significantly.
A significant number of customers of these product and services are also depositors in various banks; they like to think they earn interest on their deposits; but, as a matter of fact, the borrowing companies take their interest payments back to them, as the depositors buy the product and services of these companies at the higher prices.
‘Cooperative Business Model’, as has been outlined earlier, eliminates all of the aforementioned drawbacks that are associated with interest costs and repayments of loan amounts, as there is no loan involved in the model.
Default Loan
One of the primary reasons behind loan default is the poor financial performance of the borrowing companies.
In many cases, business project/plan for which bank loan has been approved and taken never gets implemented; instead, the loan amount gets used for satisfying personal needs and enjoyment of the borrowers. This particular reason for loan default is unprecedentedly prevalent in countries such as Bangladesh, where there exists no effective and functional surveillance system within the money market. Many banks lend huge amount of money to influential people even without any project documents or on inadequate documents that are prepared only with the aim of grabbing the loan amount; besides, a significant number of these banks have been formed with the aim of money laundering.
There are cases of rich, powerful, and influential people forming (with their illegally earned money) financial institutions such as banks with the sole purpose of passing the money through financing fake projects. All of these malpractices, taken together, puts the depositors at great risk of losing their bank deposits.
Under the Cooperative Business Model, a “Panel of Professionals”, specialized in the field of investment, would directly invest the deposited money under the authority, guidance, and control a Managing Committee to implement a business enterprise on behalf of the depositors; this means that the depositors would be the owners of the Cooperative Business, so that there exist no lending organizations and borrowing business enterprises in this model. Depositors would get profits on their investments from the cooperative they are members of. They would share profits as well as losses (on their investments) among them.
Under the Cooperative Business Model, the Credit Department (inclusive of the Consumer Credit and the Credit Card Sections) of each of the banks and the Inter-Bank Loan Transaction Facility within any specific and specified banking system could be eliminated, while holding all other functions and services of each of these banks (such as handling and mediating domestic and international financial and monetary (for instance, foreign remittance) transactions of various types) as they are; people could still deposit money in the bank at a specific and specified (quarterly, half-yearly, or annual) charge. Thus, under the Model the present-day banking system can still exist, albeit in a truncated form.