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
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
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
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. …