Could the commercial barter exchange model be used to expand and develop microfinance? Peter Haddawy explains how barter trade works and how the model could be utilized by MFIs. A 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
 
The 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.
 
In 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.
 
Understanding Barter Trade
 
A 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.

The 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 the exchange.

The 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
 
A 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 economy.

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 trade brokers.

A barter pool can be viewed as a carefully managed small-scale economy. Managers of trade exchang