Imagine: Banks operating as nonprofits, legally bound to serve goals of community development rather than the accumulation of profit, working with higher-risk borrowers while commercial banks offer loans to lower-risk borrowers, with both institutions working together to advance economic growth. Sound far-fetched? Consider microfinance, one relatively new face of the banking industry.
Pow I-80 will be hosting a lunch-and-learn on the Iowa Microloan next Thursday, the 22nd, with Craig Downs, the program’s loan administrator. Iowa Microloan, based in Boone as a program of the Iowa Foundation for Microenterprise and Community Vitality, was conceived as a way to help “those microbusinesses that are considered on the fringe of risk-bearing capacity for most traditional financial institutions,” according to the website.
Encouraging growth by growing small businesses and startups that might not be able to obtain much-needed capital from banks is a crucial concern, but arguably one has that been traditionally overlooked. Banks may not lend to higher-risk startup businesses, who are poised to gain (or lose) much more money than other businesses or individuals who might appear more credible to a bank. Microfinance addresses this by disbursing capital through nonprofit organizations. While interest rates might be higher, the lack of a profit incentive for the loan issuer encourages expansion of microloan services such that everyone can gain fair access to capital.
Part of this trend comes in the financial sector as capital becomes more fluid. The surge in the use of technology like the internet has decentralized the flow of information, giving access to new consumers, who, in turn, generate demand for things like microloans as we move toward smaller scales of economy.
Microloans come in many shapes and colors and have gained a great deal of popularity and visibility over the past decade through the use of the internet and websites like Kiva.org, not to mention through the pioneering efforts of folks like Muhammad Yunus of the Grameen Bank in Bangladesh. Yunus, who, along with his bank, won the Nobel Peace Prize, has focused on eradicating poverty through microloans, and the bank primarily serves women, a demographic economically underrepresented in the region’s economy. Some of Grameen’s loans come in amounts as small as a few dollars, while Iowa MicroLoan offers co-financing arrangements up to $105,000. The model’s flexibility and dynamism mean that it can not only be deployed anywhere, but also that it can serve a broader clientele.
One popular organization working through the internet on a more global scale, Kiva.org, allows users to lend money to specific individuals or families around the world. Users can team up or lend individually, and most loans do not collect interest. Because Kiva does not benefit from returns on its loans, it relies on individual donations and corporate sponsorship to continue operations. In spite of the zero-interest loans, default rates are low, and the operation continues to grow through improved visibility and increased donations.
The trend has also taken off locally. A student-organized group at Grinnell College, the Social Entrepreneurs of Grinnell, recently obtained 501(c)(3) certification to independently make microloans. The Social Entrepreneurs, or SEG for short, loan both to specific organizations and groups around the world as well as to individuals in the local community through Mid-Iowa Community Action (MICA), a recently developed partnership.
“It’s great that we’re able to give out loans around the world but also, intuitively, in the community we actually live in,” co-facilitator Bianca Silva, Grinnell College’s class of 2011, said
The group has periodically visited the prospect of collecting interest on its loans in order to become more financially solvent, so as to become less reliant on private donations. Sustainability in budget, as with any nonprofit organization, is a crucial concern; without interest rates, there is no guaranteed return on investments, and any defaults will continually deplete the budget, perennially necessitating more solicitations. “That’s probably going to be on the table again this year,” Silva said.
This article is not to criticize commercial banks, which play a crucial role both in contributing to the community but also in providing capital to more stable operations that have just as much demand for capital as startups. Commercial banks simply cannot assume the risks associated with some clients who instead may end up borrowing from nonprofits. Nonprofit lenders assume greater risk, often to lower returns, like in the case of Pow I-80’s revolving loan fund. Higher interest rates from nonprofit lenders may be required to balance the possibility of defaults.
As microloans become more available and lenders become better funded, entrepreneurial prospects expand, as do opportunities for community development. Market entry for new businesses becomes much cheaper with guaranteed loans that wouldn’t be approved from a traditional banking institution, while smaller loans on the scale that SEG has traditionally been working with locally can cover crucial, however basic expenses for members of the local workforce. Pow I-80 works with organizations in the community to continually develop entrepreneurial resources for startups and existing businesses and hopes to see the microloan program become increasingly utilized as one of those resources.
All are invited to the lunch-and-learn, which requires a registration fee of $8 that includes lunch. For more information, contact Deb Collum-Calderwood at 641-236-1626 or email@example.com.