I mentioned Wokai briefly in the previous post but after closer examination they deserve the full monty. Developed by 2 smart ladies (Courtney McColgan and Casey Wilson) from the US who met studying advanced Chinese at Tsinghua University.

Wokai means “I start” in Chinese and represents the entreprenuerial spirit of microfinance. It looks an amazing undertaking. With over a sixth of the world’s population the potential for domestic economic activity is enormous.

With 300,000,000 living below the poverty line and the Rural Credit Bank only servicing 25% of demand, there is clearly a large market here for small, flexible lending which is the hallmark of microfinance.

It’s another exciting addition to the microfinance and P2P stable of companies. As long term readers will know I believe strongly that P2P financing will replace traditonal banking systems within 20 years.

Who knows it may be sooner with organisations like Wokai springing forth.

The flurry of raised hands for bank guarantees from central bankers and treasury ministers around the world fails to convince me we are out of fire. Certainly guaranteeing interbank lending is helpful as the pipes are well and truly frozen in that part of the monetary world.

The global banking system has now been underwritten, guaranteed and in some cases nationalised completely. There is no surprise in that course of action as it was all they could do. Whether they take stakes in, takeover or buy preferred stock makes no difference. Now they have bought some time we will have to wait and see how it pans out. The underlying problem remains the same though.

They have not addressed the difference between money and credit.

Money is what the sovereign authority issues. This carries no interest burden which is a future claim on goods and services yet to be produced i.e. drives the growth imperative.

Credit is what banks issue based on deposits and “other types of capital” that are in the bank. This carries interest. Credit makes up 97% of the money supply. Credit is treated as money although laws are very clear that only sovereign authorities can create money.

Confused?

There is a strong argument to say that bank credit is fraudulent money. I digress.

Instead of supporting the credit creation system we need to support the money creation system. It’s that simple. Let me be clear: banks do not lend out your deposits. They use your deposits as collateral on new loans.

Take Kiva, my favorite microfinance outfit: I deposit $25, find a borrower and lend them the money. My $25 is gone and i have to wait for it to be repaid. That is true lending. Think of it as investment.

Bank lending is garbage.

The answer is to nationalise the supply of money and remove the interest burden at the point of creation. I think this is likely to happen at some point as governments run into difficulties with their guarantee schemes.

We will need a new monetary authority who will issue new money into the economy and monitor the supply of money in the economy at any given time.

Only then will we be able to build a genuinely productive and healthy society and economy.