By G. Jeffrey MacDonald Correspondent of The Christian Science Monitor
The Christian Science Monitor
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.
Loans for immigrants
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.
Depositors with hearts of gold
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. …