Lyn E. Haralson
The concept of microfinance has been around in various forms for centuries—as “chit funds” in India, “tandas” in Mexico and “tontines” in West Africa. It has also taken a more formal structure as credit unions and savings and loans. Modern-day microfinance is credited to Dr. Muhammad Yunus, a Nobel Prize-winning economist from Bangladesh. In 1976, Dr. Yunus provided an interest-free loan of $27 to a local stool-maker and other villagers, allowing them to purchase needed materials without using a money-lender who charged exorbitant interest. For more on Dr. Yunus and his model, see Daniel Davis’ article in this issue.
Microfinance has been the buzz word for international poverty alleviation for the past decade, and various platforms for this type of investment have been developed. In this article, we focus on an emerging group of microfinance funds operated on college campuses.
In a 2009 study for the Charles Steward Mott Foundation, the Microenterprise Fund for Innovation, Effectiveness, Learning and Dissemination (FIELD) at the Aspen Institute identified 11 such domestically focused microfinance organizations (MFIs) run by young, highly motivated college students with a desire to help others. While their models vary, FIELD identified that the most common offerings include training and technical assistance, microenterprise loans and, in some cases, personal small-dollar loans. Luz Gomez, a researcher on the study, reports that these organizations get their funding from private individuals, small university grants, and local banks and foundations.
The Intersect Fund
One of the most successful of the college-based MFIs, The Intersect Fund is a nonprofit organization offering services to low-income entrepreneurs in New Brunswick, N.J. Founded by students from Rutgers University in 2008 and launched in a church basement with a $1,000 bank grant, the organization takes a long-term approach, helping entrepreneurs navigate the path to the creation of a successful enterprise. Intersect’s services include Entrepreneur University, a business boot camp; loans from $500 to $5,000; one-on-one strategy consulting; QuickBooks training; business tax preparation; vending events that net $1,000 per hour; and graphic design. The Fund relies largely on student staff members to administer its business services, which keeps the services affordable.
Rohan Mathew, co-founder and executive director of The Intersect Fund, provides some insight into the creation of a student-led MFI. “When you have a program that provides funds to help low-income people achieve a dream, they are skeptical. It was important for the Fund to partner with existing community organizations that already had the trust of the population we were trying to serve.” So they chose Elijah’s Promise, a soup kitchen and culinary school, issuing their first loan in July 2009. To secure additional clients, students work with local community organizations. The Fund makes loans predominantly to existing businesses because, Mathew explains, these are small loans to very small businesses. The client wants the loan registered by the business to build the organization’s credit rather than a personal loan. Intersect has served over three dozen clients, including:
- $2,500 for a hot dog vendor to buy a second cart,
- a loan to purchase a used cargo van for an insulation business, and
- $700 for a commercial vacuum so a woman providing residential cleaning could expand to commercial buildings.
The Fund’s goal in providing these loans is to increase a person’s income or earning capacity after the loan is paid back. Gretchen Campbell was a part-time seamstress working out of her home when she received a loan from Intersect and attended Entrepreneur University. Now she runs De RiChéek, a fashion business. “The loan and assistance provided by The Intersect Fund took my business to a whole new level. It even helped me raise my credit score,” she says. For an in-depth look at Campbell’s story, read "Campus Microfinance Funds: A Closer Look."
To date, banks have provided Intersect with technical support and grants ranging from $5,000 to $10,000. In the future, the Fund hopes to secure capital from banks as well. Magyar Bank was the first corporate sponsor of The Intersect Fund and has provided annual grants to the organization. Al Dolnick, vice president and commercial loan officer at Magyar, serves as a trustee on Intersect’s board and as a member of the loan committee. He also helped develop an initial process to review loan applications and now provides continuous guidance and leadership. He hopes to serve as a guest speaker in one of the classes. Explaining why he got involved with the Fund, Dolnick says, “I liked the mission from both a professional and personal perspective. Professionally, I’m a commercial lender. Personally, I like to volunteer for organizations that have a direct impact on people who are looking to improve their lives.”
Magyar’s experience with Intersect is not dissimilar to that of other banks and nonprofits. When a bank has an established relationship with a nonprofit and is intimately familiar with the organization’s operations, the bank is better able to see opportunities for investment.
The Campus Microfinance Alliance
In 2009 Intersect hosted like-minded students from eight schools in an attempt to share best practices and initiate collaborations. From this gathering, the Campus Microfinance Alliance was created. Co-founded by students from Rutgers (The Intersect Fund), Yale (Elmseed Enterprise Fund) and Brown (Capital Good Fund), the Alliance provides seed grants and technical assistance to emerging student-run microlenders. According to Intersect’s Mathew, chair and executive committee member, 12 funds have provided training and/or a loan to domestic clients.
FIELD conducts annual fieldwide surveys through its MicroTest data collection program. According to Mott researcher Luz Gomez, FIELD data collection is critical to providing evidence of the sustainability of these organizations; FIELD hopes to get the campus MFIs successfully using MicroTest in the near future. The overall health of the entire MFI industry is monitored by the Opportunity Finance Network and published in the organization’s quarterly, Market Conditions Survey.
Getting the Most out of Bank Partnerships
MFIs need to know all the possible ways that banks investing in their organization could receive favorable consideration under the Community Reinvestment Act (CRA), including the types of data needed to substantiate the appropriateness of their investment for CRA consideration. The mission of the organization—to serve low- and moderate-income individuals—may not be enough on its own to maximize investment potential. Income data on borrowers served, geography in which the borrower operates the business and, of course, the health of the loan portfolio are important pieces of information for bankers.
In addition to other benefits that banks can receive from investing in MFIs, participation may also help them meet the requirements of the CRA. Activities that could receive positive consideration include:
- providing a grant to the organization;
- providing a line of credit or other lending facility (considered under the lending test);
- community development service consideration, including serving on the organization’s board, providing technical assistance or sitting on a loan review committee; and
- making an equity investment (including equity equivalent, or EQ2, investments) (considered under the investment test).
An investment in a fund that subsequently loans those funds to LMI borrowers has the potential for creating a “double dip” scenario, where the investment is considered under the investment test and the bank’s share of the subsequent loan is considered under the lending test.
CRA examiners look for ways that the bank has leveraged its community development partners to address the credit needs in its assessment area. A CRA officer should be able to demonstrate that the bank understands the needs in its assessment area, a level of understanding as to how those needs are being met, and where unmet needs still exist. To the extent the bank cannot meet the area’s needs with current product offerings in compliance with safety and soundness, it should be able to demonstrate partnerships with community-based organizations and other entities that can help with compliance.
While the microfinance industry has been around for years, campus-based MFIs are fairly new on the scene. With the appropriate support, this industry niche could have tremendous impact and break down the barriers that often exist between college campuses and the communities in which they exist. FIELD and the Aspen Institute are helping to strengthen this initiative by sponsoring summerlong internships at MFIs, the goal of which is to strengthen underwriting technical assistance, outcomes and impact, and build industry leaders. Similar to CDFIs and loan pools, these entities represent opportunities for banks to reach areas of their markets previously untapped by their services.