When I started Capital Good Fund, in 2009, I was inspired in large part by Dr. Muhammad Yunus, the 2006 Nobel Peace Prize winner and so-called Father of Microfinance. I loved the model he created, wherein small loans, primarily to poor women in Bangladesh, empowered them to better their own lives. Of particular appeal to me was the fact that he had demonstrated that tiny loans, done right, could be self-sustaining. That is, the interest earned on the loans could cover the costs of making them–eliminating the dependence on grants and donations.
Yunus has proven so successful in demonstrating the effectiveness of microfinance that he has inspired profit-seeking investors to move into the space; now, many international microlenders resemble the predatory actors that he worked so hard to eliminate. This flies in the face of his other innovation: the concept of the social business. For while his idea to make small, unsecured, low-interest loans to poor women was game-changing, his definition of a truly pro-poor, pro-justice business was radical. To Dr. Yunus, a social business is “a non-loss, non-dividend company dedicated entirely to achieve a social goal” where “all profits [are] ploughed back into the venture for expansion and improvement. In social business, the investor gets his or her investment money back over time, but never receives dividend beyond that amount.”
Put more simply, Yunus is saying that the investor in an entity dedicated to achieving a social goal will get her investment back–but nothing more. That is diametrically opposed, of course, to the traditional investment model, wherein the investor reaps nearly all the benefits of a company’s growth, nearly always to the detriment of people and the planet. Perhaps more importantly, it also flies in the face of how most people define social enterprise, where the idea is, in varying degrees, “to do well and to good”–to solve social problems but also generate returns for investors.
Early on in Capital Good Fund’s evolution, I sided with Yunus. Why, I thought, should investors profit off models designed to serve the world’s most marginalized people, communities, and environments? But as the years went by, my idealism was tempered by the reality that it is exceedingly difficult to raise money, be it philanthropic (grants and donations) or the zero-interest debt envisioned by Yunus. As a result, I slowly edged toward the more traditional social enterprise model, and in 2015 even rolled out a ten-year strategic plan, the end goal of which was to become 100% self-sufficient through interest income. Crucially, recognizing the challenging of securing the requisite funds, I envisioned a plan that balanced grants with debt that paid an average of 5% to investors–not unreasonably high, to be sure, but not the 0% return outlined by Dr. Yunus.
In order to generate even the modest returns we were promising, we had to price our loan products accordingly. When we launched our payday alternative loan (for those unfamiliar, payday loans are short-term, small-dollar loans with APRs as high as 1,000%), we priced it at 35%. Why? Two reasons. First, that is the rate cap proposed by consumer advocates, who understand that there is a high cost of making $500 loans and that to scale them, one must charge a sustainable rate. Second, I felt it important to price the product in a way that aligned with our goal of self-sufficiency and paying the 5% to our investors.
The Trump era, worsening climate change, Black Lives Matter movement, and Coronavirus pandemic have all radicalized me. For twelve years now I have watched social entrepreneurs and impact investors claim that it is possible to end poverty and climate change while magically generating market-rate returns, even as I’ve come to intimately understand the mathematics behind these claims. Simply put, aside from a few unique cases, one cannot do well and do good; if you don’t believe me, I’d be happy to share our financial model–this is, as I noted, not a philosophical assertion so much as a mathematical fact.
At the same time, I’ve proven that it is possible to raise millions of dollars from investors at modest rates: we’ve secured over $6 million in impact investments at a blended rate of return of about 4%. The problem is that for a long time I continued insisting on structuring our products and services to align them with a more market-based approach: I wanted to be as free from the need for philanthropy as possible.
Here’s how the pandemic changed that. Last March, we launched a Crisis Relief Loan (“CRL”) of $300 – $1,500. The product has a couple of features designed to help people during this unprecedented time, such as a lower interest rate (just 5%); three-month initial deferment period; and no restrictions on how the loan proceeds can be used. But most radical is that we created a grant-funded loan loss reserve that we leverage three-to-own with our own capital. What this means in layman’s terms is that we went to donors and said, look, these loans are going to be risky; the applicants have suddenly lost all their income, and if we want to have impact, we have to take a chance on people. Yet no amount of good intentions can change the reality that we can’t afford to make millions of dollars in Crisis Loans, only to lose a huge chunk of that due to defaults: that is bad for our investors (and us), and for the borrowers.
So instead, we asked donors to give us money for a loan loss reserve. For every dollar in the reserve, we lend out three dollars of our own funds (which we borrow from investors). As a result, as long as defaults don’t exceed 33%, none of our principal at risk. This is a fairly common approach–many nonprofit and mission-driven lenders receive loan loss reserve funds–but more radical is the other benefit. While we don’t tell clients this, if a borrower is at a point where we would normally default them, we instead use the grant funds to forgive the loan. In so doing, we protect struggling families from having their credit hurt and experiencing additional stress. (If clients knew this, they might choose not to pay from the get-go; the intention is to have the loans paid, but the grant-funded reserve gives us this important impact tool.)
The CRL has been wildly successful. As of this writing, we have closed 1,500 CRLs for $1.4 million. Funders love the idea that we leverage their donation and that the funds protect both our capital and the borrowers. Our clients love the low interest rate and added flexibility, as do our staff and community partners. And I love how the program design balances grantmaking with a social enterprise model: if we just gave out the money it would be extremely hard to sustain, but if we made these loans at market rates, we would have to deny most applicants, significantly reducing our social impact when we are most needed.
More importantly, the CRL has begun to disabuse me of the belief that I must price our products to ensure self-sufficiency, which puts a lot of pressure on us–to hit scaling goals; to make loans as quickly as possible; and to maintain the highest possible repayment rates, even if it means sometimes not reaching those our mission calls on us to serve. Prior to the pandemic, of course, a grant-funded loan loss reserve was somewhat fanciful: the philanthropic community was pretty tight-fisted and such funds were hard to come by. What’s changed is that the series of overlapping crises America is facing has radicalized more than just me-lawmakers, donors, and impact investors are all changing how they think about justice.
The timing couldn’t be better. There is simply no way we’re going to solve the climate emergency, for instance, without massive–and I mean many trillions of dollars–investments from the federal government, combined with philanthropic dollars and low-interest debt. Capital Good Fund’s role is not to prove that one can do well and do good. No, we are here to prove that one can do good, provided what many called an “integrated capital” approach: a mix of grants, low-interest debt, loan guarantees, and good public policy.
Moving forward, I am less interested in demonstrating self-sufficiency than I am in convincing stakeholders to open their wallets, reduce their return expectations, and recognize that if we want to fashion a just world, we can do it–but something has to give. Not even Dr, Yunus is radical enough for me anymore: even his idea of social business is too tame to get us where we need to be.
If the American Rescue Plan; Biden’s proposed infrastructure bill; the increasing talk of universal basic income, student debt forgiveness, and universal pre-k; and the surge in philanthropic giving during the pandemic are any indication, it seems that I’m not the only one who has been radicalized. It’s about time.
If you would like to donate to Capital Good Fund’s loan loss reserve, you can do so here. And if you would like to make a low-interest impact investment, you can learn about our Direct Public Offering here.