Things are moving quickly on the microfinance initiative I’ve been working on with a team of Brown students since June. We–the Capital Good Fund–have just completed the business plan. Between now and February 1 (when our pilot phase of 10 loans begins) we need to raise another $15,000, and iron out some of the details of our operations and loan provision. However, I feel very happy about our progress thus far. Below is the Executive Summary of our business plan which, in two pages, outlines our programs, comparative advantage, and plans for future growth. Comments are welcome and appreciated!
The Capital Good Fund (CGF or The Fund) is a microfinance organization initiated by Brown University students and supported by several local community partners. The Fund will provide affordable microloans, access to bank accounts, credit building, business and financial literacy training and other support to low-income residents of Providence, Rhode Island who seek capital for income generating activities. CGF is inspired by the success of micro finance institutions (MFIs) around the world, in particular the Grameen Bank in Bangladesh, the founder of which–Muhammad Yunus–won the Nobel Peace Prize in 2006. CGF is predicated on the belief that access to affordable capital can play a critical role in unleashing the entrepreneurial capacity of the poor, thereby raising each borrower’s standard of living and bettering the community in which he/she lives.
There is a tremendous need for CGF’s services in the US in general, and in Providence in particular. 50 million Americans have no credit score and millions more suffer from poor credit, effectively shutting them out of the mainstream financial system. As a result, America’s poor rely on fringe and predatory financial services such as payday loans, loan sharks and check cashers, which taken together are now a $100 billion industry . In Providence, a poverty rate of 25% (concentrated among women, children and minorities) and an unemployment rate of 9.3% are forcing families to seek additional streams of revenue through home-based businesses and other related ventures. CGF’s services will enable low-income Providence residents to 1) start and expand their businesses through affordable loans, 2) access services such as business and financial literacy training, 3) build credit history through successful loan repayments and 4) open bank accounts.
There are currently several hundred MFIs operating in the United States, the majority of which have failed to grow to meet the tremendous demand indicated by the size of the fringe and predatory financial markets. CGF will differ from these MFIs in several key respects:
—A Strong Network of Community Partners: One of the challenges of attracting borrowers is building trust. America’s poor are accustomed to predatory practices, be it from the neighborhood loan shark or the local bank offering sub-prime mortgages and loans with hidden fees. By partnering with some of the most innovative and well-respected community organizations in Providence, including International Institute of Rhode Island, English For Action, Center for Women and Enterprise, The John Hope Settlement House and the Small Business Development Center, CGF is able to overcome the trust barrier. What’s more, because many clients will come to the Fund via community partners, CGF has a good sense of the borrower’s character before a loan application is even filled out. Finally, the partners offer services that our clients require to succeed.
—Affordable, Flexible Loans: CGF offers loans at an interest rate of 12-15% on a declining balance (the rate varies by the size and term of the loan, see appendix C). The rate is significantly lower than what predatory lenders charge, and is in line with what other MFIs charge nationwide. Our clients will make monthly repayments. CGF offers two loan types. Business loans range from $500-$3000, and are for the creation or expansion of micro-businesses. The second type of loan is an immigration loan, which will cover the cost of applying for legal permanent residency or citizenship. A citizenship loan will be $900 and a legal permanent residency loan will be $2500 (to cover application costs and legal fees). These loans will be made more affordable because we will help clients apply for the Earned Income Tax Credit, a credit from the Federal government to working families of up to $12,000 over three years. Clients can become citizens and then use this credit to pay back the loan. Through focus groups and conversations with community partners, CGF has determined that there is strong demand for both types of loans.
—Monthly Support Meetings Model: Traditionally, international MFIs achieve default rates of below 3% by using a group lending model, where borrowers form joint-liability groups in which the group is responsible in the event of a default on the part of any individual. In other words, the social collateral created by the group creates a tremendous incentive to avoid defaulting on the loan. However, the group model has had limited success in the US, due in part to a more individualized culture, as well as the logistical and operational challenges of implementing the model. That said, Grameen America–a direct replication of the Grameen Bank–has successfully made 400 loans in Jackson Heights, New York, demonstrating that, if done properly, the group meetings can work extremely well. For our pilot phase, loan application and dispersal take place on an individual basis. However, borrowers are required to attend bi-monthly group meetings where they will receive financial and business training. This model enables CGF to combine the best of individual and group lending. Group support is maintained without sacrificing the relationship between the individual client and the lender. Finally, CGF believes that the model better prepares its clients for future interactions with traditional financial institutions, which operate on an individualized basis.
—Student Staffing: Another disadvantage many MFIs have is the high cost of operations and salaries. CGF leverages the creativity, energy and passion of Brown University students to staff the program, enabling it to grow until scale is reached and income can pay for full-time staff. CGF is developing criteria to ensure that volunteer staff has the requisite skills and commitment to deliver high quality services to the borrowers.
—Building Credit: After the pilot phase, CGF will begin reporting payments to credit bureaus so that borrowers can build their credit scores. CGF also has plans to offer credit- building loans, which are small loans specifically designed to improve credit scores and establish a relationship between the borrower and lender.
CGF has received initial grants totaling $11,100, including $5,000 from Brown University, $2,000 from the Clinton Global Initiative, $600 from the Brown Elevator Pitch Contest, $500 from the Ashoka Seed Fund, $500 from DoSomething.org and $3,000 from private donors. CGF expects to raise $16,000 for the pilot phase by February 2009 and another $80,000 to conduct a second loan cycle in September 2009. These funds will come from foundations such as the Rhode Island Foundation, institutions such as Brown University, loans, and private donations.
CGF envisions a five year plan with rapid growth. Ideally, the Fund will apply to become a community development credit union, leading to financial stability for the organization and better service provision for the borrowers. The five-year plan CGF decides on will depend on the success of the pilot phase, the demand for loans, and the amount of capital CGF is able to raise.
As the Fund grows in size and scope, there are numerous opportunities for additional products and services. One area of particular interest is the incorporation of environmental sustainability into each loan. This can be done in one of three ways: first, by providing loans so borrowers can either start a green/micro or small business or incorporate green practices into their existing businesses. Second, by providing microloans to existing clients so that they can invest in energy (and money) saving measures in the home, such as programmable thermostats and efficient windows. And third, by connecting clients to existing free and affordable services in Providence–e.g., free energy audits from National Grid–that can help them save money and create a healthier and more comfortable home and work environment.
CGF has already generated a buzz in the community about its programs. The recent economic downturn and financial crisis have underscored the need for access to affordable capital. Whereas all of America is currently experiencing a credit crisis, America’s poor are always in the midst of a credit crisis. As a youthful, innovative, community-oriented and borrower-centric microfinance organization, CGF believes it will serve a critical need in the community, raise the funds and attract the talent it needs to grow, and create a paradigm shift in thinking about the importance of access to equitable financial services.