Let�s Make A Deal: Can The Modern
Commercial Barter Model Work For Microfinance?
By Peter Haddawy and
Organized business trade exchanges have created a platform to renew
and refresh one of the oldest forms of economic growth: barter.
Could the commercial barter exchange model be used to expand and
develop microfinance? Peter and Chris Haddawy explain how barter
trade works and how the model could be utilized by MFIs.
hotelier in South Africa anticipates that he will have a certain
percentage of rooms available on most nights during the low season.
The hotel decides to offer these empty room nights to an exclusive
membership of businesses on a trade exchange. In return, the hotel
obtains advertising, transportation services and employee
incentives, all things they needed but did not have the surplus cash
to pay for. Using a trade exchange has allowed the hotel to turn its
excess capacity into thousands of dollars in products and services.
Modern Barter Trade
modern barter trade exchange industry has existed for over forty
years, surviving and growing through numerous changes in the
economic landscape. The International Reciprocal Trade Association
estimates that in 2007 the trade exchange industry made it possible
for over 400,000 businesses worldwide to utilize their excess
capacities to earn an estimated US$10bn in previously lost revenues.
This is up from US$8.25bn in 2004.
terms of income, excess business capacity represents the difference
between actual cash revenues received, and the cash revenues and
profits that would be realized, if a business operated at 100% of
its capacity. Broken down by geographic region, there are
approximately 500 commercial trade exchange companies operating in
North/Latin America with an estimated annual trade volume of
US$2.3bn, 100 commercial trade exchanges operating in Europe and the
Middle East with an estimated annual trade volume of EU1.8bn, and
approximately 100 commercial trade exchanges in Australia/Asia with
an estimated annual trade volume of AUD1.85bn.
a specific example of the kind of growth possible in this industry,
BizXchange, a retail and corporate barter company based in
Washington, California and Dubai, has grown to include nearly 1500
member businesses since its inception in 2002 and currently
facilitates over US$30 million in increased commerce between its
members each year.
barter trade exchange is a collection of businesses that trade their
goods and services, called the barter pool, managed by an
intermediary, called the trade exchange. In modern barter,
businesses do not exchange goods directly in the bilateral fashion
of traditional barter. Rather, modern barter is multilateral, using
a form of private label currency.
trade exchange issues trade dollars to the member businesses and
acts as a neutral third party record keeper, similar to a bank. When
a company sells a good or service, they receive credit in trade
dollars for the full retail amount of the product sold, which they
can then use to purchase goods and services from any other member in
value of the trade dollar is tied to the national currency providing
standard pricing guidelines that do not permit businesses to charge
more for their goods in terms of trade dollars than they do in the
open market, thus preventing devaluation of the currency.
Like A Normal Economy
barter pool is a relatively closed economy about which we have very
detailed information due to the bookkeeping function of the trade
exchange. The trade exchange maintains a general profile for every
member business, as well as complete records of all transactions
between members. A barter pool has many similarities with a
traditional economy, with the trade exchange playing a role
analogous to that of the federal government in regulating the
exchange controls such variables as monetary supply, interest rate,
rate of commission (analogous to revenue tax), and even supply and
demand through its ability to selectively recruit new member
businesses. Interestingly, although it has control over all these
parameters, the trade exchange works to stimulate the barter pool
economy primarily by making referrals to member businesses through
barter pool can be viewed as a carefully managed small-scale
economy. Managers of trade exchanges attempt to recruit member
businesses in such a way that supply and demand for each product
category in the pool are approximately balanced. Member businesses
are typically small to medium sized enterprises that offer products
They fall into the broad categories of general operating expenses,
employee benefits, and travel and entertainment. Examples of typical
businesses in barter trade exchanges include car rental, catering,
advertising, office equipment and furniture, office supplies, dental
services, health clubs, restaurants, and hotels.
is a common misconception that the primary benefit of barter is to
avoid taxes. In fact, the US Tax Equity and Fiscal Responsibility
Act, passed in 1982, legislated that barter income be treated as
equivalent to cash income and taxed on the same basis.
When a business joins a trade exchange, it typically pays a
membership fee. This represents a small fraction of the revenues of
the trade exchange. The primary revenue is made by charging a fee to
the buyer and seller on each transaction. The fee is typically in
the range of 10 to 15 percent, split equally among the buyer and
seller, and payable in US dollars (in the case of BizXchange).
When a business joins the trade exchange, they are issued a line of
credit in trade dollars, which permits them to make purchases
without first having to sell and also gives them flexibility in
conducting transactions. The trade exchange charges interest on
negative balances also payable in trade dollars, usually at the same
rate as major credit cards.
order to give a company some control over how much of their profits
are accrued in terms of trade dollars, the trade exchange permits
the member to set an upper limit on the amount of trade dollars they
are willing to accumulate. The credit line and upper limit define
the financial operating range of the business within the barter
Each member is assigned to a trade broker. A broker typically
represents a set of 100 - 200 member businesses. The broker�s job
from the standpoint of the client is to help the client sell his
goods to other members and to inform him of goods he might like to
buy. This results in new sales for the member that they normally
would not have received with their normal sales and marketing
efforts and an improvement in cash flow by offsetting normal
budgeted cash expenses.
broker�s job from the standpoint of the trade exchange is to
stimulate trade transactions, since the exchange�s revenues are
directly tied to volume of trade that occurs among members. The
broker stimulates trade by working to help clients spend their trade
dollars when they have positive balance and generate sales when they
have negative balance. The broker�s primary tool is the referral,
referring potential buyers to suppliers.
While member businesses are under no obligation to follow the
broker�s referrals, research and experience show that they generally
do. In a real operational sense, a trade exchange is like a
financial institution that not only provides loans but also works
hard to help its customers repay them through additional sales.
organized trade exchange model provides a number of interesting
opportunities for microcredit. The modest line of credit that trade
exchanges extend to members� businesses is provided in terms of
trade dollars and thus requires little or no capital to secure. This
mechanism could be used by MFIs to achieve increased leverage from
their available capital, meaning they could lower the interest and
fees charged to loan recipients.
This leveraging of capital is possible because of the excess
capacity in goods and services present among the members in the
barter pool. Thus, to use this model for microfinance would require
establishing a barter pool with a mixture of businesses, with the
poorest customers representing a certain percentage of the members.
The only real difficulty is in getting the MFI borrowers together to
get it started.
This is the kind of support to customers that is currently so
intensely discussed in the microfinance community.
Peter Haddawy at the Asian Institute of Technology, Bangkok,
Thailand and Chris Haddawy, founder of BizXchange in San Francisco,
California contributed this piece. A tutorial on the basics of
commercial barter can be found at