Marina Gorbis's Blog, page 1542

Do You Buy Stocks Just in Time for the Dividends? You're Not Alone

Companies have significantly higher stock returns in months when they’re expected to issue dividends, because dividend-seeking investors buy stock in the days leading up to the expected payment, say Samuel M. Hartzmark and David H. Solomon of the University of Southern California. A portfolio that bought all stocks of companies that were expected to issue dividends in a given month would earn abnormal returns of 41 basis points, the researchers say. But beware: Significant negative returns are seen in the 40 days after the dividend day.

Group Think Is the Kryptonite of Leadership

Let’s be honest: for the most part, we gravitate toward people who hold a lot of the same beliefs that we do. It’s human nature. But for anyone in a leadership position, this basic human urge can also be your kryptonite. If you surround yourself with too many like-minded colleagues, that is, you can create a culture of group think. That’s not good. Just take a look back at U.S. history. Lyndon Johnson’s escalation of military action in Vietnam, John F. Kennedy’s invasion of Cuba — many historians have argued that these mistakes were fueled by too many team members refusing to voice their opposition. So every leader should take this advice to heart: never shy away from opposition; welcome it — better yet, encourage it, then encourage it some more.

SOURCE: Every Leader Needs a Challenger in Chief by Noreena Hertz

Leading Across Sectors

William D. Eggers and Paul Macmillan, authors of The Solution Revolution, discuss why “triple-strength” leaders are the best problem solvers.

Download this podcast

Five Mistakes to Avoid When Managing Digital Teams

As digital becomes part of every line of business, effective marshaling of digital capabilities is a critical competency. Management is often maligned (sometimes for good reason!), but strong management is an important differentiator in both digital delivery and in aligning that delivery to strategic goals.

So what’s the best way to tackle management of digital teams to keep engagement and output high? I’ve been through two Internet booms and busts in corporations, nonprofits, and startups — so I’ve made plenty of management mistakes by commission and by proxy. Here are five common ones I’ve seen or made myself:

Mistake #1: Enabling team member silos, divorced from execution. Encourage everyone on the team — including designers, developers, and content producers — to consider deliverables through to execution. There’s a risk of managing each person on the team to his or her discrete deliverable, rather than in a way that everyone sees their reflection in the final outcome. If your team today has practices like designers throwing PhotoShop files over the wall for developers to execute, you may need to build in more collaboration. Incorporate some aspects of design thinking into your digital projects — starting from a solution is a good way for everyone to envision themselves in the final outcome, rather than focus on their piece through to handoff.

Mistake #2: Not baking data-informed thinking into the culture. Digital, social, and mobile technologies are still new enough that there’s a lot that’s measured as a binary (a checkbox for responsive design, for example) or subjectively (that new app looks great). Managers need to create a culture of continuous measurement on a team. Without this focus, development energy can be expended on the wrong feature rather than optimization of a micro-interaction to drive conversion. Communicate what the quantitative success metrics look like. Share data points with the team regularly, or better yet, display dashboards that show progress against established goals.

Mistake #3: Letting fear of failure override thoughtful experimentation.

Experimentation is essential — a digital team operating within the bounds of tried and true will not advance your goals. And by nature, some experiments fail — but how can they fail forward? Beta environments and assiduous segmenting, testing, and iteration can reduce fear of failure. As a manager, you can also highlight your own misses, along with ways you’ve avoided repeating them. Tried a new software framework without development resources nailed down for maintenance? I’ve done that. Created a private online community with too much friction to attain growth? Yep. In enterprise the culture too often is to speak of failure in hushed tones, rather than “so, this failed, and here’s what we learned.” Managers need to avoid instilling fear of the F word, so teams won’t eschew experimentation in favor of the safest course.

Mistake #4: Prizing communications control over collaboration. When many managers entered the workforce, the company dictated the terms of communication. Paper memoranda were the top-down coin of the realm, and feedback upward was limited to select channels like town hall meetings. Woe to those managers who think that world still exists. While hierarchies of all kinds are alive and well — and will be with us always — work-related communications flows have changed dramatically. Ask your digital team the best way to communicate. Successful teams will likely use a flavor of collaboration software, whether that’s an explicit project tool like Apollo or a Google doc structure. Periodically, re-evaluate this decision. Has information sharing moved to instant messaging? To Twitter? Let your team vote with their feet, apart from security essentials. You have a better shot of retaining team knowledge if you’re optimized for the real ways information travels, and aren’t waiting for updates to the company intranet.

Mistake #5: Underestimating the speed of change. In 2003, blogging was still new in the mainstream, and mistrusted by corporations wedded to large CMS installs. In 2005, it was understood that video would never be a dominant form for readers. In 2007, mobile was mostly a development afterthought. In 2012, people insisted ephemeral content was a fringe use case, before Snapchat’s ascendancy among both preteens and Wall Street bankers. Managers must develop digital teams strong not only at rinse and repeat, but with adaptable skillsets and mindsets. Set the stage for expansive thinking about what’s possible through tactics as varied as shared bookmarking sites, lunch and learns, and guest speakers from different industries. Digital is full of examples of the unthinkable becoming the inevitable — and a default-open approach to new ideas helps your team adapt for these shifts.

Nigeria's Big Gamble on One Indigenous Entrepreneur

Aliko Dangote, Africa's wealthiest man, recently signed a multi-billion dollar contract to build Nigeria's largest oil refinery, and turn the oil-rich country into a petroleum exporter. The promise of job creation — the refinery project is expected to employ 8,000 engineers and create jobs for 85,000 Nigerians — has excited many commentators. But there are further reasons for optimism, and lessons for companies looking to understand the power of indigenous entrepreneurs in emerging markets.

First, Dangote's deal is likely to happen. This is not the first time a multi-billion dollar refinery project has been announced in Nigeria. Chinese investors have negotiated several infrastructure-for-resources deals in Nigeria over the past decade. But, despite their history of success in such deals in other African countries, nothing of substance has materialized in Nigeria. The latest set of contracts, penned in 2010, have run aground due to haggling over Chinese access to oil blocks and the threat of unfavorable regulation.

It is not surprising that China's success in countries like Angola and Sudan did not translate to Nigeria. In their research on "Winning in Emerging Markets", Harvard professors Tarun Khanna and Krishna Palepu theorize that emerging economies have unique combinations of institutional voids (e.g. the absence of market intermediaries or inefficient contract enforcement mechanisms). Tarun and Palepu suggest that what works in one country does not necessarily translate to another, and companies have to repeatedly assess their capabilities and decide whether to:

Replicate or adapt a business model from a different situation
Collaborate with domestic partners or go it alone
Navigate the market's voids or try to fill them/

For Chinese companies, the institutional voids in the Nigeria deal include the complex web of entrenched political interests, and their inability to navigate it. Lobbyist groups with opposing interests like the Nigerian fuel importers and the European exporters with which they are aligned have had more influence on political decisions than Chinese companies. While countries like Angola also have related issues, Nigeria's size and complexity probably would have led the institutional voids theory to prescribe a different strategy of adaptation and collaboration. China instead had to deal what economist Raymond Vernon calls the obsolescing bargain, in the form of post-agreement power grabs by government agencies.

On the contrary, Khanna's and Palepu's theory would suggest that Dangote, as an insider with political connections at the highest level, is better positioned to directly fill the market's voids and deal with the political risks.

Another reason for optimism is that Dangote's move might signal a shift to a conglomerate-led growth phase in Africa. Clay Christensen's research explores interdependent versus modular approaches to customer problems (pdf). Interdependent systems are well suited to situations where "the job-to-be-done" is not well understood, or the current solution is not "good enough". Modular systems tend to arise after the solution has become "good enough", and help the industry participants achieve greater efficiency. Underdeveloped emerging markets, with their weak institutions, can be seen as being in the "not good enough" stage. At this stage, the theory would predict the dominance of interdependent business groups with strong links to institutions and government. Thus, transforming the fate of the country's economy would necessitate pushing these groups to progressively more complex "jobs".

This is exactly what we have seen in fast-growing East Asian economies, where national business groups like the Korean chaebol or the Japanese keiretsu have been instrumental in the shift from commodities to higher-value manufacturing. Samsung started off as a trading company, evolved to textiles and food processing, and then on to high-value add manufacturing. Today their business spans electronics, shipbuilding, construction and aerospace, among many other industries. Samsung's story is a microcosm of the Korean growth miracle.

Similarly Dangote's business, which has already transformed from a trading company to a manufacturer of cement and flour, could now be moving into a new phase of higher value-added products. This step into more complex "jobs" may also draw other African conglomerates into the mix, and create a platform for rapid industrialization.

Of course, it can be argued that Dangote's move is risky for Nigeria because his success would concentrate too much power in one man's hand. This is a valid concern — the conglomerates of East Asia have had disproportionate power throughout its growth, and retained significant influence even as the economies move into modular phases. Samsung alone is still responsible for a mind-boggling proportion of Korea's economy.  African governments can mitigate this by diversifying contract awards to various national players, but ultimately it may be a worthy risk for the promise of growth led by indigenous companies.

Welcome to the 72-Hour Work Week

How many hours do you think the average American professional works each week? If you think 40, 50 or even 60, think again. For many, 72 hours is the new norm.

In a recent survey of 483 executives, managers, and professionals (EMPs), we found that 60% of those who carry smartphones for work are connected to their jobs 13.5 or more hours a day on weekdays and about five hours on weekends, for a total of about 72 hours. Assuming these people sleep about seven and a half hours a night, that leaves only three hours a day Monday-Friday for them to do everything else (e.g. chores, exercise, grocery shop, family time, shower, relax). It also means they spend 62% of their waking hours every week connected to work (82% on weekdays). That seems like a lot.

But it’s not the connectedness itself that bothers EMPs; in fact, in many cases they appreciate it. One EMP described getting an urgent work request via her personal smartphone while she was on vacation but said she was happy to handle it because it took her two minutes, compared to the hour it might have taken another person. She cares about her work and her colleagues and wants to save others time and trouble, wherever she is.

What does bother EMPs is when companies use 24-7 connectedness to compensate for organizational inefficiencies and when it significantly undermines their personal lives, productivity, creativity, and ability to think strategically. The complaints we heard most often (from at least three-quarters and as high as 96% of respondents) centered on useless meetings and emails, inadequate technology, disorganized or incompetent C-suites, and unclear decision-making authority.

One manager we interviewed talked about an incident where he was out on a date and received a message saying he had to get on a strategy call with an executive at 9pm on a Friday night. This wasn’t an emergency; the manager had simply changed his mind about a decision he’d made earlier that week and that was in the process of being implemented. Another study participant who moved from an executive job requiring him to be constantly connected (including on weekends and holidays) to a position at another company with a less demanding schedule told us it was a dramatic shift. Previously exhausted and stressed, he said he felt “a huge difference.” “It’s astonishing how much you can get done when you’re not in meetings for 10 hours a day and things aren’t cycling 24/7. Since people aren’t working round-the-clock, I don’t get stuck in responder mode. I can actually think a little bit about what I need to do, which is saving me time and lowering my stress level. This is certainly not a low-stress job, but I don’t feel like I’m in hyper-drive mode all the time anymore. I’m really energized.”

The message is clear: EMPs don’t necessarily mind being connected to work for more than eight hours a day. But they are upset when it happens because leaders don’t respect their time or their official work day is wasted, so they have to make up the time working from their laptops or smartphones at home.

There are many steps organizations can take to avoid this problem. Frequent equipment and software upgrades can ease technological delays, for example. Clear decision-making guidelines will prevent bottlenecks in the chain of command. Reducing and eliminating meetings will free up schedules so work can get done during work hours. And C-suite leadership that emphasizes both the importance of not wasting time and the benefits of down time can go a long way toward changing the always-on culture.

We’ll never be truly disconnected from work again. But smart organizations will make sure their employees appreciate that connectedness.

Decision Making, Top Gun Style

When Tom Cruise's "Maverick" inverted his F-14 fighter jet and gave "the bird" to his Soviet opponent in the opening scene of 1986's Top Gun, Cruise assured himself a lighthearted place in the history of the Cold War. What that scene also did, however, was provide one of cinematography's great examples of a key concept of air-to-air combat: the OODA loop. Maverick's uncanny ability to move rapidly through a complex decision cycle, always ending up in a superior position, not only made for great cinema but also represented one of the more complex theories to emerge from 20th Century military thinking.

The brainchild of now-deceased Air Force Colonel (ret) John Boyd, OODA (short for Observe, Orient, Decide, and Act) became a cornerstone of training for air-to-air combat in the latter half of the 20th Century. The OODA loop was Boyd's way of simplifying a four-step cycle which he considered the backbone of an air-to-air engagement. When two pilots faced off in a dogfight, the pilot who was able to observe the variables, orient his aircraft to the best possible position relative to his opponent, decide on the best course of action to engage his opponent, and act rapidly on that decision would win the fight. The OODA loop has been popular with military planners ever since, driving everything from selection of personnel to large-scale military plans.

Special operations teams, for example, are known for their detailed planning, intensive training, and utilization of advanced technology. This effort goes far beyond "being prepared." It is a conscious strategy to outpace the OODA loop of the opposition. Each element is designed to more effectively Observe the situation, Orient oneself or unit appropriately, Decide how best to maneuver, and take effective Action.



The OODA loop is well-suited for individual or small-team situations like aerial dogfights and ground skirmishes. But is the modern battlefield, enterprise, or marketplace too complex for the theory to hold?



We believe modern leaders face the same problem as Boyd's fighter pilots decades ago: they need to make decisions better and faster than the opposition. Like fighter pilots, they must acquire data, turn data into insight, and then act on that insight. The difference is that modern leaders must enable entire organizations to have this capacity.



Can an organization learn to move like a fighter pilot? Can thousands of people collectively Observe, Orient, Decide, and Act?



In previous posts, we've discussed how special operations teams re-oriented their decision process in Iraq and Afghanistan in order to exponentially increase their ability to receive, analyze, and create collective understanding of broad amounts of data. This understanding ultimately drove a decision and action cycle that was able to outpace the terrorist networks they faced.



In the corporate world, organizations are also beginning to create large-scale OODA loops. Social media monitoring is one of the key technologies for creating OODA loops. During the Super Bowl blackout, Oreo received a lot of attention for its tweet, "You can still dunk in the dark." This didn't happen by accident. Lisa Mann, then VP of Cookies at Oreo-maker Mondelez International (she's since moved up to Senior VP of Global Gum), had set up a "social media command center" — one that would have been very familiar to any special operations team. All of Oreo's agencies and stakeholders were physically and virtually connected. "Everyone [was] in place to jump on a real-time marketing opportunity," Mann said. Oreo had designed a system to give it an OODA advantage.

Dell is also using social media monitoring tools to Observe, but going further by creating OODA loops that extend beyond marketing into the entire organization. Dell has a permanent Social Media Command Center that monitors conversation and activity for every one of its products across all social channels. What sets Dell apart are the relationships between the Command Center and the lines of business. The communications channels enable the organization to respond quickly to what is observed in the marketplace. For example, Dell was able to change the pricing on a product in a single day, neutralizing a potential customer insurgency.



Some CEOs are beginning to apply large-scale OODA loops within the executive suite. New York City Mayor Michael Bloomberg is known for putting his desk right in the middle of the action with line of sight to everything happening around him. Facebook CEO Mark Zuckerberg also has his desk in the middle of an open office, and has now hired Frank Gehry to create an entire corporate campus as a single open office.



The CEO of Scotts Miracle-Gro, Jim Hagedorn, is taking a different approach. Fittingly, Hagedorn spent his younger days as a jet fighter for the U.S. Air Force where the OODA loop became second nature to his thinking.



Hagedorn wanted to replicate what happens inside a jet fighter's mind. Scotts' Situation Awareness Room enables senior leadership to physically gather and share information in an open, common space. The room is ringed with real-time data tied to strategic priorities and advanced video-conferencing systems. The SAR is the central node of the network, intended to create collective understanding, then rapidly disperse decisions and plans for action.



Scotts' Situation Awareness Room is well designed to Decide, and Act. But how do you get the data you need to Observe and Orient? Scotts' answer is the Analytic Center of Excellence. A group of hand-selected personnel will each represent key nodes of the larger organization and sit right next to the Situation Awareness Room. The team will feed data and analysis to help leaders better Observe and Orient prior to Decide and Act.



What approach should you take? You might focus on collaboration in an open office like Facebook, or a highly structured intelligence network like Scotts. There isn't a single right answer, just the right answer for you. Can you beat the competition to Observe the situation, Orient yourself to your goals, make Decisions swiftly, and take effective Action? If so, then you will have become a modern day "Maverick" and a Top Gun leader for the digital age.

Investors Will Like Your Company Better if You Shorten Its Name

On average, companies with short, simple names attract more shareholders, generate greater amounts of stock trading, and perform better on certain financial measures than companies with hard-to-process names such as National Oilwell Varco and Freeport-McMoRan Copper & Gold, say T. Clifton Green of Emory University and Russell E. Jame of the University of Kentucky. A 1-step increase in name "fluency" on a 5-step scale, such as reducing name length by 1 word, is associated with a 2.53% increase in market-to-book ratio, which would translate to $3.75 million in added market value for the median-size firm in the authors' sample. Selecting an easy-to-process company name is a low-cost method for improving investor recognition and increasing firm value, the authors say.

How to Use Psychometric Testing in Hiring

Roughly 18% of companies currently use personality tests in the hiring process, according to a survey conducted by the Society for Human Resource Management. This number is growing at a rate of 10-15% a year according to many industrial and organizational psychologists, as well as the Association for Test Publishers.

When used correctly, cognitive and personality tests can increase the chances that new employees will succeed. Since the cost of a bad hire is widely estimated to be at least one year’s pay, there are huge incentives for organizations to get hiring right. Unfortunately, too many organizations use the wrong psychometric assessments in the wrong way. Here’s what organizations need to know in order to minimize potential risks and maximize the predictive accuracy of these tests.

Know the law. Organizations, hiring managers, and HR need to keep legal compliance in mind when they add psychometric tests to their pre-employment screening system. Because of anti-discrimination laws, assessment tools (especially cognitive ability tests) need to be job-relevant and well validated. In the United States, because of the Americans with Disabilities Act, tests generally need to respect privacy and not endeavor to “diagnose” candidates in any way.

One recent example of an organization that has changed its assessment battery due in part to concerns about racial discrimination and poor prediction of job performance is the National Football League. Unless jobs involve law enforcement, weaponry or other special safety considerations, organizations should not ask candidates to take any assessment that was designed for the purpose of diagnosing susceptibility to depression, risk for other kinds of mental illness, or any kind of personality disorder.

Know the business needs. Psychometric tests will not help you if you don’t have well-established measures of job performance. Too often, organizations focus more on the predictors, or “independent variables,” than on what is being predicted, or “dependent variables.” If an organization doesn’t have quantitative measures of employee performance on the job, then there is no basis for statistical correlations of how well psychometric tests (or any other kind of candidate evaluation for that matter) predict performance.

Once you know the business needs, make sure you find a test that will actually evaluate those characteristics. For instance, while there are laws that prohibit companies from discriminating or invading candidates’ privacy, there are no laws that prohibit companies from using strange or invalid assessment tools. If a company wanted to use astrology to pick a Scorpio instead of a Libra as the new CFO, there wouldn’t be any legal risks to doing so (as long as there wasn’t any correlation between astrological sign and candidates’ membership in “protected” classes of people). But most people recognize that horoscope would be the wrong categorization tool for filling your open job. What they don’t realize is that other, often-used tests might also fail to predict the desired results.

For instance, while the Myers-Briggs Type Indicator (MBTI) is quite popular with many organizations, it should not be used for employee selection. The MBTI was not developed for that purpose and is not intended for personnel evaluation — even the test’s publisher warns against using it in that way.

Reduce the risk of cheating. In order to safeguard against the possibility that candidates will ask others to take tests, especially cognitive ability tests, on their behalf, organizations should “proctor” the assessment test, either by having the candidate take the assessments in their offices or by monitoring candidates via video conference if they are remote.

Keep in mind that some candidates may be tempted to “game” the results. Compare the candidate’s references and interview ratings with their results to determine if the two are consistent. If a candidate for a sales job seems shy and understated in interviews and is described as quiet and introspective by her references, but tests as a people person who constantly needs to be in the limelight, this discrepancy may raise the question of whether the applicant is attempting to engage in “impression management” in order to come across as a more ideal candidate.

Some psychometric tests have built-in measures that indicate whether a candidate’s pattern of responses may reflect an attempt to come across a certain way or whether the candidate’s answers are incongruent with one another. Using multiple psychometric tests can help organizations get a more consistent picture. But don’t overdo it. Even a well-developed, legally defensible, and predictive assessment battery will not add value if candidates feel it is too time-consuming or intrusive.

Share test results with candidates. While in most psychological research, “informed consent” gives candidates the right to see their results, few organizations provide access to the reports based on the psychometric tests that applicants take. Often, organizations even ask candidates to sign a document waiving their right to see their results. But there are both ethical and pragmatic benefits to sharing results, regardless of whether a candidate receives or accepts an offer of employment.

Any candidate can benefit from the feedback of a well-validated, job-relevant psychometric test report. The candidates who receive and accept offers will appreciate that the reports can provide a helpful basis for discussions about their “onboarding,” and the candidates who either do not receive or do not accept an offer will still appreciate the organization’s professional courtesy of sharing the feedback with them.

(If you would like to take a personality assessment for free online, which will provide results that are similar to some of the well-validated personality tests on the market that organizations use — and where the confidential results will come directly to you — try the IPIP 120.)

Test the tests. A well-developed performance appraisal system should evaluate job performance quantitatively (not just qualitatively). This gives the company “criteria for correctness” that it can use to measure how well its pre-employment screening tests actually predict success on the job. It’s best to think of this process of validation as a scientific research endeavor, with the hypothesis being that a given psychometric assessment will predict job performance, and with that hypothesis being subject to ongoing empirical validation with the potential for disconfirmation. If an assessment doesn’t predict performance over time, stop using it.

High performing organizations constantly evaluate and improve their candidate evaluation systems by paying attention to predictor variables, outcome variables, and the correlations between the two. Psychometric tests should be subject to the same rigorous testing and validation as the candidates they are being utilized to assess. When hiring managers and HR utilize the right methodology to select and retain the right psychometric tests, they can significantly raise the probability of selecting and retaining the right talent, too.

The End of Banks as We Know Them?

Last week my father received a phone call from the branch director of his long-standing bank to offer him a new product. My father, instead of listening with confidence to the advice of a trustworthy agent, was immediately suspicious. He dreaded another 30-page prospectus full of small print — and another potential trap. My father's experience is mirrored all over the world. Millions of people have lost confidence in banks.

But the dissatisfaction and disappointment with our banks runs deeper. The last bank in my hometown closed a year ago. After serving the community for more than thirty years, it was no longer seen as economically viable. Another casualty of cost cutting, it simply closed its doors — even though local people and businesses that had used that bank all their lives still relied upon it. Again, this story is repeated around the world. This, we are told (in expensive TV ads), is progress. A global world needs global banks — whether we as their local customers like it or not.

But something has been lost along the way. Even before the banking crisis of 2008, something was gradually, but undeniably, in decline. Trust. Millions of savers and borrowers listened (and still listen) to reports of record profits at their bank — even as they are told their local branch is closing to save costs. The two facts do not add up. Today, the belief among ordinary account holders that banks are there to serve us has all but disappeared. Where once they were regarded as pillars of the community, banks are increasingly seen as the unpalatable face of big business.

In many cases, banks have sacrificed the needs of the local community — and indeed the belief in the community ideal — in the scramble to go global. That globalization has come at the cost of local service. What the banks seem to have forgotten is that the global village is made up of millions of local communities. (The banking sector is not alone in this. In industry after industry, companies have gone global with something approaching abandon, often with little regard for the local communities that gave them life.)

So, why is this and does it matter? And, perhaps more importantly, can anything be done to fill the yawning gap in local communities all over the world? My research suggests that there is a viable alternative to local banks. It is something I call community financing.

Community financing refers to a form of cash-flow that channels the financial resources of the savers of a community into the well-being of that community via economic activities, which members of the community believe should be undertaken and therefore willingly supports with their savings.

There are many examples of Community Finance initiatives around the world, some large some small. Think of Kiva, Kickstarter, or microlending. But it's not all about internet startups or social enterprise. One of my favorites is the story of the JAK Members Bank (or JAK Medlemsbank), a co-operative member-owned financial institution based in Skovde, Sweden. The bank does not participate in capital markets; all of its loans are raised solely from member savings. In 2011, JAK had assets (savings) of 131 million Euros and 38,000 members, who are each allowed one share in the bank and determine its policies and direction.

JAK relies on the "saving points" system — members accrue points for saving and use them to apply for a loan. The idea is that you are allowed to take out a loan for yourself to the same extent that you allow other people to receive loans. The bank uses a simple accounting rule to ensure its own sustainability: overall, earned savings points must equal spent savings point. JAK does not charge or pay interest on any of its loans (a principle it shares with Islamic banking).

To see how this works in practice, consider a true story. An entrepreneur in the small community of Skatteungby, some 300 kilometers from Stockholm, asked the JAK Bank for a loan to develop a shop. Although he remained ultimately responsible for paying back the loan, the project was able to go ahead because he enjoyed the support of individuals within the community who wanted the shop. Enough people in his local community made a deposit from their personal savings into the account to finance the shop, fulfilling the saving schema that JAK requires for granting a loan. In this scheme, the risk stays at the bank, the responsibility of repayment to goes to the entrepreneur, and the community foregoes the potential gain in interest in their deposits in exchange for having a local activity in the town desirable by many of their members. This is one of the sharing risks schemes that characterize community finance.

Such initiatives are now on the increase around the world, not just in emerging economies but in the developed economies of the West. They offer a fresh approach to financing local businesses and providing local banking services. They also offer a chance of redemption for the traditional banking system.

Let me explain.

Since modern banking began in the 17th century to offer a channel from people's deposits to people's needs, the number of people using the banking system has grown steadily reaching percentages of more than 90 percent of bank users in countries such as the U.S. or the UK, making it difficult for citizens to believe that we could do without them. But, since the beginning of the 20th century, different crises of liquidity and debt have given banks a bad reputation.The growing distrust of conventional banks is provoking an outflow of deposits to entities outside the conventional banks and even some outside the regulated system in different crowd-finance platforms, peer-to-peer lending systems and cooperative lending entities. These initiatives are suddenly becoming popular. They provide micro lending services to local community businesses. Some such as Accion in the USA , or Fondo de Solidaridad de Granada, have been around for years. Others, such as "Bank on Dave" in the UK are newer.

Elsewhere, other alternative community financing initiatives are underway. For example, new technologies have made it possible to develop crowd sourcing lending platforms, such as Kickstarter in the USA, or or Goteo in Spain , for peer-to-peer financial services. Some of these initiatives are regulated by financial authorities, some leave on the margins as private associations, but all are becoming increasingly popular to fill the gap left by traditional banking. In parallel financial inclusion, through financial literacy or providing banking services to financial excluded communities are part of the new landscape such as Kenya Post Office Savings Bank.

The fact that people may trust more an unknown virtual platform in the web than its neighboring bank is not as crazy as we might think, if we consider that default rates of some of these systems are estimated to be less than two percent when the banking system might get as high as eight percent or even 10 percent in the case of credit cards.



And yet can we seriously envision that the next level of finance, at least for the personal loans or small business, will leave the banks? And do we really want it to? If this happens, the long process to provide the financial system with regulation and security controls will be undermined, and we would lose centuries of banking expertise in analyzing loans and risks. If banks are perceived to be providing loans to the governments and large corporations ignoring the personal loans and/or small business, alternative systems will grow provoking serious consequences for depositors as well as for the system itself, unless there is a way to re-gain the lost confidence.

My generation (and my mother's before me) grew up watching It's a Wonderful Life in tears every Christmas eve. The classic film offers an eloquent lesson in how much good a bank can do for a community. For decades it has been the most avidly watched Christmas film. Deep down many of us believe that, as James Stewart puts it, "A good bank is the one that does good to its community and a bad Bank is the one that feeds the avarice of corrupt individuals." Simple but powerful.

For traditional banks, the clock is ticking. But it's not too late.