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SMALL Australian communities are thumbing their noses at the main banks which have left town for the sake of bigger profits.

Communities on both sides of the Tasman have been left reeling at the speed and ruthlessness with which the big banks have deserted them.

In Australia about 1500 bank branches have closed since 1992.

In New Zealand between 1994 and 1998 the main banks reduced their branches by 411 to 1101. Some closures were due to mergers and included city branches.

In the past year 13 mainly rural Australian communities have done what country folk do best taken charge of their own destinies and set up their own bank with the help of a small regional bank. A further 15 are planning to follow suit before the end of this year.

As the last big bank closed its branch, the communities turned to Bendigo Bank, which was prepared to help them set up a community bank.

Under the Bendigo system the local population raises about $250,000 needed to buy and establish a franchise branch and does the market research to prove it will work. In return Bendigo Bank supplies the infrastructure, including products, and underwrites the loan facilities.

The profits from the branch are split evenly between Bendigo and the community.

Communities were raising the $250,000 needed in less than two months and more recently were over-subscribed, with most shareholders putting in between $1000 and $1500. There is a maximum investment of $5000.

The maximum shareholding acts as a safeguard against an individual holding too much power. Key to the concept is that each shareholder has one vote, regardless of the number of shares held. Shareholders can expect to earn a return on their investment of about 2 per cent above the term deposit rate.

Communities created their own company and volunteer board to run the bank while senior staff made redundant by the main banks were employed as managers.

It took most communities six to eight months to work through the process.

Bendigo Bank's head of community banking, Russell Jenkins, told Wellington audiences recently that a locally owned bank allowed small towns to take control of their destinies.

Successful communities create successful banks. It really is the case. This is where we think we are different to what's happening out there in the marketplace," he said. "If you have a successful community and you are the natural banker to that community, then we as bankers are going to do very well."

Mr Jenkins was not here to drum up business. About 500 Australian communities are queuing outside his door demanding Bendigo set up shop in their town.

"While we would love to come to New Zealand, to do so at this stage, to have to take out a banking licence, to have to create a whole new infrastructure when we have so much of Australia to go to, it probably doesn't make a lot of sense"

Mr Jenkins said in Australia the economic cost to a small community when the last bank left was crippling. Traders typically lost between 25 per cent and 40 per cent of their turnover after the last bank closed, as people travelled out of town to bank and shop.

Banks which closed community branches were in turn affected by the loss in turnover from business clients in that community.

"Those businesses suffer and therefore your business suffers," Mr Jenkins said.

The well-beaten path to community banking schemes in New Zealand is littered with casualties.

Wellington city councillor Brian Pepperell and former councillor Celia Wade-Brown began investigating the possibility of a Wellington regional bank to keep money and profits in the region last year. Nothing has come to fruition.

The Nelson Enterprise Loan Trust was also looking into the possibilities of a community-owned bank and began a survey to gauge support in June.

Proponents of community banking in New Zealand have taken heart with Bendigo's success, but banking experts are more sceptical.

They say geographically few communities here are as isolated as those in Australia. Our small population is also seen as a limiting factor as is the Kiwi enthusiasm for embracing electronic alternatives.

Despite criticism levelled at banks for reducing their branch network, New Zealanders have taken to electronic banking - eftpos, phone banking and Internet banking like ducks to water.

KPMG banking chairman Andrew Dinsdale said the argument for community banking was ideologically driven by small but vocal groups rather than by popular support.

"It's going to be small whatever it is in New Zealand, because we don't have the population.

"Generally most people have accepted the substitution of branch to other forms of banking," Mr Dinsdale said.

Massey University banking studies director David Tripe said the main difficulty the bank exodus had caused in New Zealand was the ability for retailers to dispose of their cash.

A money exchange, such as that established in Maungaturoto in Northland, might be a better model to meet those needs than a full community hank, he said.

The money exchange allowed people to drop off deposits and make eftpos withdrawals. Deposits were taken to the depositors' banks in Whangarei.

"My view is there are other solutions other than the Bendigo Bank solution in a New Zealand environment," Mr Tripe said.

Community banking used to be a familiar part of the New Zealand banking landscape in the form of Trustee Banks which sold out to Westpac to become WestpacTrust in 1996.

Kevin Rimmington, managing director of New Zealand's sole remaining community bank, Taranaki's TSB Bank, said the same thing could happen again.

TSB Bank owes its success not to entering markets deserted by others, but from having been part of the Taranaki community for 149 years.

He said raising capital to support a franchise scheme would require issuing shares which were open to being sold to larger competitors.

'It would be difficult to make a go of it. It must be profitable if the profit is going to be ploughed back in, in the true community bank style where the profits become the capital."

Mr Jenkins said Bendigo Bank's experience with company owned branches suggested small community branches could be profitable. Bendigo was already working successfully in towns with populations as small as 500.

"We are not doing this purely to be nice guys, we are doing it at the end of the day because it is good for our business. We know that we can provide shareholder return by getting in and supporting these very small communities."

But Mr Jenkins had a word of warning for those leading the charge to establish community banking in New Zealand.

He said despite the popular uproar when the last bank left town, it was extremely difficult for a new bank to pick up sufficient business to survive.

"Despite all the rhetoric about what is happening in regional markets, time and time again in Australia you will find that less than 30 per cent of locals support the last bank in their town.

"You get them coming to public meetings and you get a lot of anger about the fact that local bank branches have shut. In reality so many bank elsewhere."

In one town 100 people attended a public meeting calling for Bendigo to establish a banking service. But after two weeks of opening an agency, just five new accounts had been opened.

Even if the departing bank only retained 60 per cent of its business, the savings in overheads of operating the branch and the savings associated with electronic banking services, meant it was worth getting out to enhance shareholder returns in the short term, Mr Jenkins said.

Also, before leaving town banks usually sought to lock in key customers through fixed loans to discourage them from changing banks.

The motivation for a community bank in the short term was usually driven by the loss of over-the-counter services.

"But it's no good just building your business on anger because people are peeved off at the other banks for closing.

"There is no guarantee that people will bring their business over. In fact it's pretty hard for them to do so."