The Role of Motivated Financial Institutions on Community Currencies Loans

Abstract

Community currencies have recently emerged as tools for assisting the disadvantaged. In order to make a contribution to the larger field of community currencies, the purpose of this research is to investigate how a financial institution evaluates community currency lending. We show, using an adverse selection model, the importance of the role of motivated financial institutions in the effectiveness of community currency loans for small entrepreneurs. If those institutions are unmotivated, the market collapses, and only traditional loans are offered. Additionally, if there is enough intrinsic motivation, the size of the loans also increases, which is beneficial to the borrowers. Finally, this paper emphasizes the importance of subsidies in this sector, which act as catalysts by increasing the likelihood that community currency loans will be offered, as well as increasing loan sizes.