This rental is a bit expensive to justify for longer visits.

The Traveling Economist’s Foray into Community Finance — Buying a Shared Scooter

“Community Finance” is, loosely, all the money stuff that happens between individuals that isn’t normal commerce. In most cases it is lending and borrowing.

I’m making my first foray into a community finance arrangement here in Cebu, Philippines, a place I intend to visit occasionally. It involves co-ownership of a scooter (and a small amount of financing.)

What’s important here is that I’m not making a microfinance loan. I’m making a mutually beneficial arrangement that, if everyone behaves as promised, will result in more consumer surplus than would have otherwise been achieved.

Economic surplus

Consumer surplus is the value of a transaction over and above the price paid for it. By working together, we will both receive more value than we would have otherwise.

The Deal

The second hand scooter costs 30,000 Philippine Pesos (₱), which is about $600 US Dollars.

My friend has 15,000₱ ready now and will need to borrow the additional 15,000₱ if I didn’t get involved. For my part, I intend to visit this area in the future, and I know this family well enough that I trust them. So what we will do is I will provide the remaining 15,000₱.

However, I will pay only 10,000₱ for 1/3 ownership of the scooter. They will not give up the scooter for a 1/3 of the time, but I can also take it as I need it — We both benefit from this kind of arrangement. The ability to have something on-demand is not free, and that’s why I would pay more than just the percentage of the days I’ll use it.

Then, they will repay me the 5,000₱.

The Benefits of this Arrangement

Then we got to talking about the benefits of the scooter and his repayment plan. I asked him how the scooter would impact his finances:

1. Right now he pays 60₱ a day, or $1.20, to transport his kids to school. The scooter would replace that. That’s 300₱ per week.
2. His wife makes food deliveries as part of their side hustle. Per fare is 7₱, so 14 each way. On average she does 10 deliveries per week, so that’s 140₱ per week.

This family makes a local rice cake and delivers it to people when they receive orders.

If we assume that is the only financial benefit received, and don’t account for things such as the ability to get missing ingredients at the last minute or make more deliveries and attract more business (no small benefit), then we can assume a net savings of 1,848₱ per month.

His payment into the scooter is 20,000₱, and with a savings if 1,848₱, he will break even after 20,000₱ / 1,848₱ = 10.8 months. Taking fuel and repairs into account, maybe break even is a solid year.

What is my benefit? If I downgrade my fancy PCX, I can rent a scooter like the one we are buying for 400₱ a day. If I visit this town for 6 weeks in a year, I would pay 18,000₱. I’m financing 5,000₱, but once that is repaid, I will have paid 10,000₱. This means I should be in the black in just over half a year.

Choosing between a higher cost per unit, such as shampoo or transportation, and an investment in something that saves money in the long run, is the basis of household financial planning.

Repayment

He requested four months to repay me the 5,000₱. We arranged for him to pay our mutual friend 300₱ per week, which is the exact amount he would be saving from the kids’ trips to school.

The Value of Trust

The consumer benefit explained above, to both my friend and myself, is the value of trust: we are able to arrive at a better economic arrangement for us both on the basis of trust. The 1-year value of trust in this case is 8,000₱ for me, and 10,000₱ + interest-free financing of 5,000₱.

Community finance is built on this trust. I have been interviewing members of this community about personal loans, and the vast majority have reported that they are usually repaid (but not always.) Of course, those who do not repay are not lent money again.

This experiment is more than just a nomad’s travel hack: I am working in the decentralized finance space which is building trustless finance — This means financial arrangements that can be entered into without having to trust anyone or any institution. Yet — How will we, as DeFi founders, get people to trust this system in the first place? Leveraging the rails of community finance might just be the first step.

As Rossco Paddison, CEO of the startup I work with, says:

Trust is transferable if its packaged correctly

If we can find a way to package DeFi products so that they will “ride the rails” of community finance, we can introduce these products to the people who can benefit from them the most.

Join this and other conversations about decentralized finance in DeFi Nation.