Understanding Morris Plan Banks: Definition, Operation, and Impact
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Summary:
Morris Plan Banks, pioneered by lawyer Arthur Morris in 1910, revolutionized lending by prioritizing character over collateral. With a focus on underserved communities, these banks offered loans without requiring traditional forms of security. Despite initial success, the emergence of mainstream lending institutions post-Great Depression led to their decline. This article explores the unique approach of Morris Plan Banks, their operational mechanisms, and the factors contributing to their eventual obsolescence.
Understanding morris plan banks
Morris Plan Banks emerged in response to the financial struggles faced by poor and working-class individuals who were often overlooked by traditional banks. Founded by Arthur Morris in 1910, these banks represented a departure from conventional lending practices by placing emphasis on the borrower’s character and community standing rather than tangible assets. The first Morris Plan Bank was established in Norfolk, Virginia, with a modest initial capital of $20,000.
Distinctive approach to lending
Unlike mainstream banks of the time, Morris Plan Banks did not require collateral for loans. Instead, they relied on personal references provided by the applicant, along with a thorough assessment of the borrower’s character, financial history, employment, and wages. This approach allowed Morris Plan Banks to extend credit to individuals based on their reputation and integrity, rather than solely on their financial assets.
Operational expansion and impact
Arthur Morris’s innovative banking model gained widespread recognition, leading to the rapid expansion of Morris Plan Banks across the United States. By 1931, the network had grown to include 109 banks operating in approximately 100 cities under the Morris Plan Co. of America. This expansion significantly enhanced financial inclusion for underserved communities, providing them with access to much-needed credit facilities.
Loan structure and repayment mechanism
Morris Plan Banks introduced a structured approach to lending, wherein approved borrowers received loans without collateral. Interest and fees were deducted from the principal amount, and borrowers committed to purchasing Class C Installment Thrift Certificates on a weekly basis to facilitate loan repayment. This systematic repayment mechanism ensured gradual debt reduction and financial empowerment for borrowers.
Special considerations
The Morris Plan’s reliance on personal references marked a departure from traditional lending practices, highlighting its commitment to community-based lending. However, this approach also posed challenges, particularly for certain demographics, such as women, who faced difficulties in obtaining loans due to stringent requirements and lower earning power compared to men.
Example of a morris plan bank
To illustrate the operational mechanics of Morris Plan Banks, consider a hypothetical scenario: a borrower seeks a $150 loan at 6% interest with a $1 fee. Upon approval, the borrower receives $140 after deducting interest and fees from the principal amount. Subsequently, the borrower purchases Class C certificates weekly to repay the loan, ultimately redeeming them for cash upon loan completion.
Frequently asked questions
How did morris plan banks assess loan applicants?
Morris Plan Banks evaluated loan applicants based on their character, community standing, financial history, employment, and wages, rather than relying solely on collateral assets.
What role did personal references play in morris plan lending?
Personal references provided by the applicant served as guarantors for the loan, assuming responsibility in case of default. These references, along with the applicant, played a crucial role in assessing the borrower’s credibility and ability to repay the loan.
Why did morris plan banks decline in popularity?
The emergence of mainstream lending institutions post-Great Depression, coupled with evolving lending standards, led to increased competition for Morris Plan Banks. This, along with the exclusion of certain demographics and changing consumer preferences, contributed to their eventual obsolescence.
Did morris plan banks offer any financial innovations?
Yes, Morris Plan Banks pioneered various financial products and partnerships, including auto financing and credit life insurance policies, to enhance customer experience and mitigate risks associated with lending.
Key takeaways
- Morris Plan Banks revolutionized lending by prioritizing character over collateral, making credit accessible to underserved communities.
- Their structured loan repayment system and innovative financial products set a precedent for modern banking practices.
- The decline of Morris Plan Banks was attributed to increased competition from mainstream banks and evolving lending standards.
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