Banking, the Swedish model

Rising style of lending is built on long-term thinking – and on bearing in mind that the institution is dealing with real people's money.

Johannes Lindgren
‘It’s Back-to-Basics Banking,’ says Kristoffer Lüthi, Ekobanken’s vice managing director. The Järna, a Sweden-based bank (behind Mr. Lüthi), succeeds by staying local.

While many of Europe's largest banks were accumulating "toxic" assets in recent years, a gentler, quieter banking movement was emerging here that espoused a wholly different set of investment values.

Institutions such as Sweden's Ekobanken aim to not only keep clients' deposits safe, but also to invest in the "social economy," by funding projects like alternative energy, affordable housing, and organic farming.

Although some of the global financial giants have stumbled, these so-called social banks are reporting surprising successes.

"It's back-to-basics banking," says Kristoffer Lüthi, vice managing director of Ekobanken. "Lending out money to people and institutions you believe can pay it back, and not believing in a too-rapid financial development, because that's not sustainable in the long run."

A brisk business for Ekobanken

Located near Stockholm in the picturesque rural town of Järna, Ekobanken opened in 1998. In stark contrast to most of the banking industry "we've never had credit losses," Mr. Lüthi notes.

Last year brought a 12.5 percent increase in customers and a 38 percent jump in bank deposits, raising Ekobanken's balance sheet to about 400 million Swedish kronor (about $50 million). Since Ekobanken started, its balance sheet has risen by between 15 - 20 percent yearly.

Ulla Herlitz, chairwoman of Ekobanken's board, says, "We are working with the real economy and not the financial economy." When asked to define the term, "financial economy," Ms. Herlitz replies, "selling paper."

A May 2008 article in MoneyWeek warned that the world market in derivatives had grown to $596 trillion, noting that this was only "the nominal value of all the underlying assets against which bets have been placed."

Such numbers frustrate the leaders of Ekobanken, who believe many banks have effectively gambled away clients' funds.

"A very simple thing in banking is to know that you're dealing with other people's money," Lüthi says.

Lüthi feels their role should be more than just good-sense banking. It should be "about changing the minds of people, changing the consciousness around money, and also being a voice in society that shows it is possible to make things different," he says.

Operating an interest-free savings-and-loan program for its members since 1970, Sweden's JAK cooperative officially became a bank in 1997. Today, it has roughly $116 million in deposits from its 36,000-plus members. JAK's 2008 credit-loss rates have been less than half those of regional megabanks SEB and Swedbank.

"We think it's important to invest in member education instead of marketing," explains Ann-Mari Svensson, general secretary of the cooperative. "The bank holds seminars where interested members can learn more about the bank and finance at the bank's expense."

JAK's coordinator of international relations, Miguel Gonzo, says his bank is not trying to make a political statement. "Maybe, by what we practice, we're positively changing the society somehow. And if changing the society is political, we're political in this way."

A return to banking's past?

Although JAK and Ekobanken are relatively young, their emphasis on local investment has deep roots. About 150 years ago, small savings banks sprouted throughout Sweden's countryside, a result of financial resources being concentrated in cities. These banks transformed local money into local well-being.

According to Ekobanken's Herlitz, with the advent of globalized finance, local depositors' money began to leave the community. The local focus is good for the economy and a smart business practice, she says, because the banks possess a "better ability to judge banking needs and risks."

Lars Ingelstam, former professor of technology and social change at Linköping University, says that Sweden's sparbanks – its traditional community savings banks – have lost much of their local focus in recent years because of a series of mergers.

The Swedbank consortium now controls the bulk of the savings banks, Professor Ingelstam says. Through the mergers with Swedbank, the independent savings bank associations heavily concentrated their assets under the Swedbank umbrella. They have since been hurt by Swedbank's now diminished market value.

Ingelstam, who was the first director of the Swedish Secretariat for Future Studies, a think tank founded by former Swedish Prime Minister Olof Palmé and Nobel laureate Alva Myrdal, observes that society has been "far too narrow-minded" in its evaluations of "social progress and the economic measurements and the figures we build up."

Not necessarily small

Yet a healthy bottom line and access to a vast pool of credit remain standard measures of success. Triodos Bank, a self-professed "ethical bank" founded in the Netherlands in 1980, has much to brag about. It's one of the largest institutions in the sustainable bank movement, managing about $5.6 billion in total assets and operating offices in Britain, Belgium, and Spain. Last year, Triodos grew by a quarter and its net profits rose 13 percent. On June 5, the Financial Times newspaper named it the overall winner of its sustainable banking award.

"We have had a very good year," says Triodos spokesman James Niven, who attributes the bank's success to its "not being involved in all kinds of financial instruments."

Triodos does not invest in the subprime market or derivatives. "We take in savings from different individuals, and we only lend them to businesses delivering positive change for people or the environment," Mr. Niven says.

Although these banks stress that their ideas are based more on sound and ethical business principles than politics, some analysts believe politicians ought to take notice. Jakob von Uexküll, founder of both the British-based World Future Council and Sweden's Right Livelihood Award (also known as the "alternative" Nobel Prize), argues that banking interests have become so powerful that they have been effectively able to "take over governments to get the kind of legislation they needed."

Referring to the megabanks, Mr. von Uexküll adds, "They need to be dismantled.... If an economic entity is too big that it threatens the state, it threatens democracy."

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