For a cart-pushing immigrant who just arrived in Manhattan or a young farmer on the Great Plains, the lending industry has good news: Small-scale lenders who cater to minorities and economically depressed areas are increasingly able to offer competitive interest rates.
This trend also spells opportunity for ethically minded investors (read: depositors) who want to take advantage of rising interest rates while putting their money to work to fight poverty.
Banking with a social mission is still a far cry from the norm across the United States. Yet what's known in the business as "community investing," is among the fastest growing sectors of banking. Community-invested dollars have nearly doubled over two years, from $7.6 billion in 2001 to $14 billion in 2003, according to the Social Investment Forum.
And for depositors who want to know their money is at work revitalizing neighborhoods or financing the business world's underdogs, opportunities have never been better. "Microfinance has really become an industry of its own," says Robin Ratcliffe, vice president for communications at ACCION International, which takes $9 million a year from individual depositors and uses it to finance small-asset businesspeople in the US and abroad. "It's not just this little thing done by [nongovernmental organizations] anymore. It's done as banks for the poor."
Across the country, lenders are cultivating specialties that cater to both the bottom line and social vision. They're doing so in nearly every case through a twofold approach: 1) by drawing on a wealth of local knowledge to screen out excessively risky borrowers, and 2) by leveraging capital in creative ways that minimize risk to depositors.
In Minnesota's Twin Cities, for example, recent immigrants from Southeast Asia often speak broken English and lack sufficient credit to borrow from traditional lenders, says University Bank President David Reiling. Yet because 30 percent of staff at the bank is of Southeast Asian descent, loan officers often speak the right dialects and use neighborhood contacts to ferret out who's a good risk and who's not.
"In some cases, you've got to dig a little deeper than other banks are willing to do," Mr. Reiling says. "You have to not only listen to a story and verify it, but at some point you have to believe it."
Social missions vary depending on the lending institution. Chicago-based ShoreBank, for instance, underwrites about 45,000 rental units, most of which are being rehabilitated by inner-city owners, along with other types of urban renewal. Meanwhile, the publicly funded Bank of North Dakota fulfills its mission begun in 1919 by today underwriting the loans of most of the state's college students and financing farmers whom others might regard as too risky. In each case, lenders face the challenge of recouping extra costs incurred by tapping local knowledge and doing extra research on those perceived to be potentially risky borrowers.
ACCION, for instance, would lend $500 to a first-time store owner in Latin America or Africa, but the interest rate might be as high as 60 percent a year to cover the costs for local affiliates to do an in-person investigation of each business, no matter how remote. Local businesspeople don't mind paying, Ms. Ratcliffe says, since their alternative is sometimes to pay loan sharks as much as 5 percent a day.
Prospective depositors might wonder what the catch is. Sometimes there is one. At Chittenden Bank in Brattleboro, Vt., depositors into two socially responsible accounts voluntarily accept a lower-than-market interest rate. In return, they can feel good that the bank is likewise lending their dollars at discounted rates to small family farms, conservation groups, and educational institutions among others. "I don't know what the difference is, but I know it goes to a good place." says Chittenden customer Bob Woodworth, who runs a local sporting goods store.
But some community lenders are offering market rates on mission- driven savings accounts and certificates of deposit. They can do so, says Self-Help Credit Union spokesman Malcolm White, because their loans really aren't as risky as regular banks think they are. Defaults, these lenders say, are rare. "You just get better at managing your lending practices with experience," Mr. White says, noting that SelfHelp has for 24 years been lending to help minorities, rural residents, and women in North Carolina grow wealth. Socially-minded lenders, he adds, "are getting better at managing risk, and that's to the benefit of borrowers and depositors."
Here's how it works: Anyone from any state can open an account with Self-Help, for example, by joining the credit union with a one-time $25 fee. After that, a member might open a "child-care certificate of deposit." Deposited funds would then be earmarked for lending to day-care operators, who often help working mothers in rural North Carolina. After five years, a depositor would get his or her money back plus 4.28 percent earned annually.
With banks, the process is even easier. Find a mission-minded lender on the Internet, request a form, and send it back with a check. American Banker Online offers a Community Banking webpage (www.americanbanker.com/communitybanking.html) that can help you get started.
Some lenders keep a low profile, such as the Bank of North Dakota, which does not advertise in order to keep from competing with its local bank partners in the private sector. But increasingly, banks with a social niche are marketing themselves as such with hopes of attracting more out-of-state dollars to support their quintessentially local projects. University Bank has hired a public relations firm to promote its Twin Cities programs nationally.
Depositors who make a point to open an out-of-state certificate of deposit want results, lenders say, in terms of both the financial and social bottom lines. The former, it turns out, might be the easier one to guarantee. ShoreBank, for instance, guarantees its deposits through the Federal Deposit Insurance Corp. (FDIC), which makes sure depositors can get their money even if borrowers default.
Depositors with the Bank of North Dakota have no FDIC guarantee, but they do have the state's coffers as well as a double-A-minus bond rating to vouch that funds will be there. And ACCION takes the safeguarding step of using its deposits from individuals merely as collateral to guarantee riskier loans abroad. The actual dollars from depositors are invested conservatively, Ratcliffe says, mostly in bonds.
Social dividends are sometimes harder to deliver. In St. Paul, Minn., for instance, University Bank's investments in properties owned by African-Americans on Selby Avenue led to such a hike in real estate prices that owners sold and left. The upscale bars and restaurants that moved in didn't necessarily reflect an ideal neighborhood transformation. "There was some gentrification," says Reiling. "Now we're trying to get African-Americans to move back in."
Despite pitfalls along the way, socially minded bankers have also seen signs of progress. For example, a 2002 study by the Federal Reserve Bank of Minneapolis found that the Hmong people, a major ethnic group in the area, actually enjoy about as much access to capital as whites do. Reiling interprets that as "a positive sign" that his bank's niche is generating more than financial returns.
For some investors, community investing has become the only way to go. Jerilou Hammett of Santa Fe, N.M., has invested exclusively in ShoreBank since the 1980s for the dual benefit, she says, of investing safely and knowing her money is improving inner-city neighborhoods.
"To find a bank that shares your values is a very unusual situation," Ms. Hammett says in a telephone interview. "It means my money gets used in some very beneficial ways.... It supports indigenous development of the area where the bank is located."
"It is the reason we exist - to do this sort of thing," adds Ron Grzywinski, chairman of ShoreBank, "and to demonstrate what's possible with the nation's banking system."