#1370 1998 · Banco Palmas / Instituto Palmas (Conjunto Palmeiras, Fortaleza) · Community development banking
A poor Fortaleza district printed its own money that only worked inside the neighborhood
the problem
Only 20% of residents' spending stayed inside Conjunto Palmeiras; every purchase exported the neighborhood's cash
background
Conjunto Palmeiras, a district of Fortaleza built by displaced families who won paved streets and electricity through their residents' association in the 1980s, had 32,000-plus inhabitants and no bank branch. A 1997 survey by the association found residents spent roughly 1.2 million reais a month — and 80 percent of it left the neighborhood at the first purchase, because local commerce was thin and credit came from loan sharks.
Through 1997, ninety-six popular assemblies debated the leak and voted to create a bank owned by the residents' association. Banco Palmas opened in January 1998, staffed by locals, lending to people no bank would touch, followed by a 'buy in the neighborhood, it's more jobs' campaign of posters, plays and photo-novellas in 1999. In 2002 the bank issued its own paper.
what everyone would do
Wait for a bank branch or a government program, or copy a standard microfinance scheme — and 80 percent of every paycheck still exits at the first purchase.
what they saw
Development would not arrive and cash kept leaving. Print money that is worthless outside and it becomes worth more inside — discounts, wages and loans all reroute spending to local shops.
the move
The palma circulates at 1:1 with the real but only affiliated merchants can convert it back — so it cannot leak. Consumption microloans are disbursed in palmas (first loans around 50 palmas, rising with repayment; no interest, a 1 percent admin fee); neighborhood employers pay part of wages in palmas; 240-plus local shops accept it and around 70 give palma-payers discounts of 2 to 5 percent. Conversion back to reais happens only at the bank, which recycles the stock into new local loans; credit decisions take 48 hours on neighborhood knowledge rather than credit-bureau files, and defaults ran 1 to 2.5 percent.
why it works
The constraint was circulation, not income: each real left at the first purchase. A currency redeemable only by local merchants gives every unit several local lives; the 2-5 percent discounts make paying in palmas privately rational; loans denominated in palmas inject new local money while building repayment records; and the bank's monopoly on conversion recaptures and recycles the stock. Ninety-six assemblies made the currency the community's own project — which is also why the central bank's counterfeit case collapsed. Local staff and 48-hour decisions turned neighborhood knowledge into underwriting, cutting default to 1-2.5 percent against 6-8 percent at commercial banks.
the payoff
Local spending share rose from 20% (1997) to 93% (2009, the bank's own data); the model spread to 100+ community banks in Brazil
where it breaks
The currency is only as strong as local supply: the neighborhood petrol station, importing 81 percent of its inputs, dominated conversions back to real. As bank cards and conventional credit arrived, usage eroded — 58 percent of residents used it in 2008, about 20 percent of clients by 2012; the founder's own verdict is that it worked as a catalyst and symbol rather than a permanent medium. It needs dense local commerce to give the money somewhere to live, and loose conversion rules invite outsiders to arbitrage the discounts.
what came after
Instituto Palmas (2003) replicated the model nationwide — 68 community development banks by April 2012, more than 100 later — with partnerships from Banco do Brasil, Caixa and BNDES. Brazil's Central Bank prosecuted the founder for issuing 'counterfeit currency'; he won, and social currencies were later formally recognized.
references
- [1]Community currencies in Brazilian community development banks: The case of Banco PalmasInternational Institute of Social Studies, Erasmus University, 2013iss.nl
- [2]Solidarity finance through community development banks: lessons from Banco Palmas (RAUSP)SciELO / RAUSP Management Journal, 2012scielo.br
Widely retold, only partly documented. Filed as hearsay.