Development Banking: Giving Credit Where Credit

Is Overdue

4 Shei Ia Middleton and Mark Hooper of the Good Faith Fund.

It is mid-morning, and the car's air condi­tioner has already lost its battle with the scorching Arkansas sun. As usual, Mark Hooper and Sheila Middleton are on the road, visiting small towns in the state's depressed southeastern delta. In the last six months, they have put more than 20,000 miles on the '88 Chevy, and it shows: There are dents caused by hail­storms, windshield cracks from rocks sprayed by eighteen-wheeler trucks, and crusts of mud from the dirt paths, coun­try fields, and ditches they have learned to navigate.

Cruising down the two-lane highway, Hooper flips on a rock tape while Mid­dleton readies her Sarah Vaughan, and it becomes clear that each partner's good­natured tolerance-and growing appre­ciation-of the other's musical taste is part of a broader camaraderie that has formed on these rides.

Hooper, twenty-five, is a former youth counselor from Little Rock. Middleton, thirty-one, grew up in rural Arkansas and previously worked at a bank. Their job is to generate interest in the Good Faith Fund, an experimental lending program that provides small amounts of credit to low-income, self-employed people who would not qualify for conventional bank loans. The towns they have come to know are typical of the delta-towns where Main Street consists oflittle more than a gas station and two or three shops, and where railroad tracks often serve as racial and economic dividers.

A large part of Hooper's and Mid­dleton's work as "enterprise agents" is to win the trust of local residents before testing their receptivity to the Good Faith Fund. That means spreading the word not only at official forums-local chambers of commerce, adult education centers, church meetings-but also at in­formal gathering spots like the town luncheonette.

Their formal meetings and leisurely chats have a specific purpose: to find ex­isting or potential entrepreneurs who could benefit from financial assistance. Perhaps an auto mechanic needs help opening his own garage, or a home-based seamstress could use a loan to buy better fabric. Or maybe someone has an idea for another kind of venture-running a road­side food stand, for example, or turning a sideline skill into a full-time profession.

Native Southerners, Hooper and Mid­dleton understand that "visiting" is an important prelude to business, and they are skilled at cultivating local contacts.

"This part of the delta has been ignored for so long that people are sus­picious of outsiders who try to get something done;' says Hooper. "It takes time to overcome that resistance:'

Hooper and Middleton are foot sol­diers in a quiet campaign to create new economic models for rural and commu­nity development. It is a campaign with a broad front-from the villages of Bangladesh to the streets of Chicago to the delta and mountain regions of the American South. Although the programs vary, they share a common approach: the use of "development banking" methods to provide new opportunities in tradi­tionally disadvantaged areas. A devel­opment bank is a federally insured de­pository institution that uses its resources to foster grass-roots economic develop­ment. It invests in low-income communities through housing loans, as­sistance to small businesses and self­employment ventures, and support for neighborhood renewal projects.

Two leaders in this movement are the Southern Development Bancorporation in Arkansas , which includes the Good Faith Fund, and the Center for Commu­nity Self-Help in North Carolina. Established in 1988 with a $12 million in­vestment, Southern is a private bank holding company with an ambitious plan to stimulate economic activity in de­pressed regions of Arkansas. David Osborne, author of several books on state development strategies, has called Southern "the most radical experiment in rural economic development since the Tennessee Valley Authority:'

The Center for Community Self-Help, which established a credit union in 1984 with $57 raised at a bake sale, has shown that development lending can begin with more modest resources and expand to have a broad impact. Today the center is a major force for economic development in North Carolina, and is the only inde­pendent statewide community credit union in the United States.

Social Goals and the Bottom Line The Southern Development Bancorpora­tion was designed as an alternative to the

standard model of rural development in the South: using public subsidies and low wages to lure industries from the North. Such "smokestack chasing" brought textile and metalworking plants to Arkansas in the 1960s. But over the last decade many of these factories have moved to lower-wage areas elsewhere, leaving thousands of workers jobless in devastated one-company towns. In re­cent surveys, Arkansas had the eleventh highest rate of unemployment in the United States and the lowest proportion of college graduates-less than 10 per­cent of its population.

In a search for new strategies, Arkan­sas Governor Bill Clinton, together with the Winthrop Rockefeller Foundation in Little Rock, set out to explore pos­sibilities for smaller-scale economic development that would nurture home­grown businesses and develop local en­trepreneurial skills. These efforts led them to the Shore bank Corporation of Chicago, known for its innovative use of a bank holding company to revitalize an inner-city neighborhood.

Established in 1972 as an experimental project, Shorebank has succeeded in stemming the decline of Chicago's dete­riorating South Shore, mainly through a program to increase home ownership and rehabilitate low- and moderate-income apartment buildings. At the core of the bank holding company is a federally reg­ulated bank that can receive deposits and make conventional loans. Associated with the bank, and benefiting from its re­sources, are several nonprofit and for­profit subsidiaries that develop low-in­come housing and commercial real estate and can undertake riskier investments in local businesses. The profits from the bank are used to support the economic development efforts of its affiliates, thus providing the potential for self-sustaining growth.

By combining social goals with the bottom-line discipline of a bank, Shorebank has demonstrated that this type of hybrid institution can be a power­ful vehicle for economic development. It has also pioneered the concept of socially responsible banking. Crucial to Shorebank's growth has been its ability to attract "development deposits" from cus­tomers across the country who support its community renewal programs.

Access to Credit In the United States and overseas, the

Ford Foundation supports efforts to in­crease disadvantaged people's access to credit and to test the development potential of alternative, depository-based financial institutions. Since 1986 the Foundation has committed more than $9 million in grants and program-related investments (PRis)* for these activities. Funds have supported bank holding companies, re­volving loan funds, and credit unions that seek to improve the standard of living and employment prospects oflow-income peo­ple. Organizations assisted include:

• Arkansas Enterprise Group (Arkadelphia), grants totaling $450,000, for the Good Faith Fund, a microen­terprise loan program for low-income entrepreneurs.

• Center for Community Self-Help (Du­rham, N.C.), grants totaling $350,000 and a $2 million PRI, for a venture-capital fund that finances business enterprises of disadvantaged people, and for training, technical, and financial services to worker and community groups.

• Grameen Bank (Bangladesh), grants totaling $950,000 and a $1.5 million PRI, for a program extending credit to poor self­employed villagers.

• National Federation of Community De· velopment Credit Unions (New York), a $225,000 grant and a $1 million PRI, for projects aimed at improving the lending and development capacities of credit unions serving low-income communities.

• Shorebank Corporation (Chicago), $690,000 PRI, to open a branch of its bank holding company in a second low­income neighborhood in Chicago.

• Southern Development Bancorporation (Arkadelphia), $2 million PRI, to help cap­italize a bank holding company providing technical and financial resources for small businesses and local entrepreneurs in Arkansas.

• PRis are loans, loan guarantees, equity invest· ments, or other financial mechanisms that underwrite projects consistent with the Founda· lion's program objectives.

The Southern Development Bancor­poration, launched last year by Shorebank and the Winthrop Rockefeller Foundation, represents the first attempt to use a bank holding company to foster economic development in a rural area. While Shorebank has focused on rebuild­ing one urban community, Southern has 5

6

a much more ambitious goal: to create jobs in a vast, multicounty area by pro­moting self-employment and local business formation. Based in Arka­delphia, an hour's ride from Little Rock, Southern is concentrating on south Arkansas-an area particularly hard hit by plant closings. In Arkaaelphia alone, some 1,500 people out of a population of 10,000 have lost jobs over the last five years.

Like Shorebank, Southern operates a commercial bank, a real estate develop­ment company, and a network of finan­cial affiliates. The Arkansas Enterprise Group (AEG), a nonprofit corporation, is Southern's development-lending arm. AEG includes the microenterprise loan program of the Good Faith Fund; a ven­ture capital company, Southern Ventures Inc., which makes equity investments in larger locally owned companies; and a seed capital fund for loans to new and ex­panding businesses. As an unregulated financial institution, AEG can provide the kind of high-risk financing generally un­available at banks.

The Good Faith Fund Based in Pine Bluff with a staff of four, the Good Faith Fund serves one of the poorest regions in the state. Modeled on the successful group-borrowing ·system developed by the Grameen Bank in Bangladesh, • the Good Faith Fund takes an unorthodox approach to lending, re­quiring neither job history, credit rating, nor collateral from its borrowers.

Instead, loan applicants must organize into groups of five, attend a two-week orientation session, and then collectively choose which two members will get the first loans. After two months of regular repayments on these loans, the next two borrowers are eligible. The fifth member gets a loan after all four borrowers have made scheduled payments for four months. Loans range from $500 to $2,500 for first-time borrowers and up to $5,000 for established members. The Good Faith Fund charges market rates of interest, and payments are due bi­weekly. Borrowers must also make reg-

• For further information about the Grameen Bank, see "Increasing Income and Employment in Bangladesh;' Ford Foundation Letter; November 1988, p. I.

ular deposits in a group savings account. Julia Vindasius, the Good Faith Fund's

twenty-eight-year-old manager, recalls the early skepticism of people who felt a lending model created in Bangladesh could never work in rural Arkansas. "Everyone thought that American bor­rowers would resist working in a group;' says Vindasius. "But in fact, people who are self-employed understand the isola­tion of running your own business and have been very receptive to the idea, es­pecially as an alternative to having to raise collateral for a conventional bank loan:'

The Good Faith Fund has a capital base of $500,000, provided by grants

"Communities here are sparsely populated, which makes the market environment for small businesses very tough. So it's an extremely difficult path and not appropriate for a lot of people. But for those willing to take the risk, the Good Faith Fund can help."

from Ford and other foundations. So far it has formed nine borrowing groups and made small loans totaling $82,000 to twenty-five borrowers, mostly minority men and women who have no access to conventional financing. In many cases, the Good Faith Fund is the first institu­tion that has treated these borrowers as legitimate business people.

In Dumas, Ark., Fanny Slater has been running a small dress shop for seven years. But every time she applied for a loan to expand her stock, the local banks turned her down. "The truth is, it's diffi­cult for blacks to get loans in this town;' she says. "We've seen other businesses come and go while we've always man­aged to stay on. But the banks still didn't believe we were sound enough to invest in. The Good Faith Fund was the first in­stitution that believed in us:' Mrs. Slater has used her $2,500 loan from the fund to purchase a new fall line and to advertise her shop for the first time.

For Dorothy Quarles, a grandmother

who worked most of her life as a cook in private homes, the tiny take-out food shop and catering service she recently opened on a small commercial strip rep­resents the fulfillment of a lifelong dream. Despite hard work and personal sacrifices, the shop is just barely getting off the ground. But Quarles expects busi­ness to pick up now that she has a new stove and a steam table, purchased with a $1 ,600 loan from the Good Faith Fund.

"It's very hard to start a business with no money and no way to raise it from the banks;' says Quarles. "I'm not earning much profit yet because everything is re­invested in the shop, but I'm doing what I love to do:'

The Good Faith Fund is continually altering and adjusting its program to meet new needs. For example, the fund has changed its initial policy of giving checks directly to borrowers. Most loans are now issued as payments to vendors. The switch, motivated by difficulties in monitoring loans, has also led borrowers to plan their business purchases in ad­vance, and to shop around for the best price before taking out a loan.

Vindasius cautions that self-employ­ment is not a panacea for the deeply entrenched poverty of the Arkansas delta. Although they have low incomes, clients of the Good Faith Fund have ei­ther the experience or self-confidence to try to run their own businesses. Says Vin­dasius: "Communities here are sparsely populated, which makes the market environment for small businesses very tough. So it's an extremely difficult path and not appropriate for a lot of people. But for those willing to take the risk, the Good Faith Fund can help:'

Morning Glories It is 7:30a.m. and the self-styled "Morning Glories" have gathered in the small Pine Bluff office of the Good Faith Fund for their last orientation session. The group's nickname was inspired by the early hour of their meetings, ar­ranged to accommodate members' work schedules.

Mack, a self-employed plumber, is seeking a loan to fix his truck, upgrade equipment, and expand his business. ]. R., an employee at a hardware store, is hoping to become an independent trader of nuts and bolts and needs a loan to buy

stock and rent storage space. Ruby, a high school art teacher, wants to buy tools to start a home-based business pro­ducing wooden craft products. Ida, a nurse, also runs a small dress shop. She is seeking a loan to make her shop more profitable by expanding its inventory. Brenda co-owns with her husband a video production company. She needs financing for a potentially lucrative pro­ject: With a new convention center bringing in more out-of-towners, she is

cess. To make it more appealing, the Good Faith Fund has devised an exercise that seems to work.

"We invented two characters, 'Pipe Dream Patty,' who has dollar signs in her eyes but no dollars in her pockets be­cause she has unrealistic ideas, and 'Do It Donna,' who really analyzes her com­petition, figures out where she's going to make money, and is enthusiastic but clear-headed about how to proceed;' ex­plains Vindasius, who first became

Fanny Slater used a loan from the Good Faith Fund to purchase a new line of clothes for her shop in Dumas, Ark.

proposing to make promotional videos for local advertisers to distribute to the area's hotels.

All five were strangers before forming the group. They found each other on the Good Faith Fund's list of potential bor­rowers, took some time to get acquainted and determine reliability, and have now spent almost three weeks sharing per­sonal stories and business goals and helping each other shape viable loan pro­posals. The orientation sessions provide training in how to formulate a business plan, keep books, devise marketing strategies-much of which is new to members. Most borrowers are unac­customed to keeping detailed financial records or assessing the different factors necessary for a successful operation. Moreover, learning new management skills can be a slow and frustrating pro-

interested in microcredit techniques as a graduate student in urban planning at the Massachusetts Institute of Technology. "They're our points of reference in figur­ing out who is and is not being realistic about their product, their customers, and all the other things basic to running a business:'

The Morning Glories have decided that the first two loans will go to Brenda for her video project and to Ida's clothes shop. But every proposal has been exam­ined and refined so that each borrower is better prepared to handle the respon­sibilities of a loan. Says Vindasius: "We're teaching people how to build a relationship with their banker, how to take on a debt that's realistic, and to real­ize that taking on a debt is a serious obligation:'

Once a group is established and receiv-

ing its first loans, it must attend meetings with other groups in its area every two weeks. These sessions give borrowers the opportunity to discuss business ideas, exchange advice and information, and evaluate new members' loan pro­posals. Often the Good Faith Fund provides speakers or mini-workshops on pertinent business topics.

"What we're discovering is that our members are starved for learning;' says Vindasius. "They really want to know how to be better business people. They join the Good Faith Fund because of the credit, but they stay around because they enjoy the forum we provide, the chance to network and learn more about running a small business:'

So far the Good Faith Fund has had to write off three loans, all from early groups that were formed when the pro­gram was still taking shape. "We're learning the ropes the hard way;' says Vindasius. "What's been important is that we've felt free to implement this in a learn-by-doing way. We're committed to just plunging in and doing it:'

The fund has already begun to have an impact. More than 100 new people have expressed interest in forming borrowing groups, and initial resistance in the local financial community has been replaced by support and even admiration. Vin­dasius was recently inducted into the Pine Bluff Rotary Club, becoming the the fourth woman to be admitted to the ISS-member group.

One of the fund's main challenges is reaching a larger volume of clients in an area of small, spread-out rural commu­nities. Aside from Vindasius, Mark Hooper and Sheila Middleton are the main recruiters . Using the company car as a mobile office, they spend long hours on the road, pitching the Good Faith Fund to people conditioned by complex social realities.

"Part of what we're doing is trying to heal wounds;' says Hooper. "We're ad­dressing not only economic conditions, but deeply rooted social and racial divi­sions as well:' Adds Middleton: "At first it was very frustrating because we didn't feel productive. But now we're starting to get results, and it's so rewarding. The people we reach really appreciate what the Good Faith Fund has to offer and all the work that goes into it:' 7

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Venture Capital While the Good Faith Fund is showing that small loans can make a difference in people's lives, Southern is learning that its venture-capital resources are much in demand by larger-scale entrepreneurs. "Everyone told us that the major prob­lem would be 'deal flow,' that we'd have all this capital to invest in companies but there just wouldn't be any users for it in rural Arkansas;' says George Surgeon, president of Southern's Elk Horn. Bank in Arkadelphia. "And it's turned out to be the absolute reverse. The demand for equity capital for small businesses has truly outstripped our resources:'

Since it began last year, Southern Ven­tures, Inc. (svi), Southern's small-busi­ness investment company, has received eighty inquiries from local entrepre­neurs. The strong response reflects the unique role of SVI, which is the only in­stitution in the state providing equity financing to small businesses. sv1 has al­ready committed most of its initial capital of $1.25 million through investments in five ventures, with another eight cur­rently under review.

Jeff Doose, svi's president, believes the company's bank affiliation has been a major factor in attracting serious appli­cants. "The bank projects an i~age that people understand;' he says. "They real­ize that this is not a giveaway program, that there are serious preparations re­quired before they make an inquiry, that a thorough investigation of both the busi­ness concept and business operator will be made, and that there will be legiti­mate expectations of performance on both sides:'

SVI closely monitors its operations, providing intensive management and technical assistance. It thereby hopes to improve the prospects for success in a generally high-risk field. "We watch the businesses constantly;' says Doose, who heads a staff of three. "We require them to attend monthly board meetings where every aspect of the company's perfor­mance is evaluated in detail. If problems or opportunities arise that we think the company has to address, we put their feet to the fire and compel them to re­spond. And we provide assistance in responding. If we see a terrific market opportunity emerge, we'll help design the marketing strategy. If there are prob-

)ems in production, we put on our blue jeans and go into the plant to help re­solve the problems:'

So far, SVI has helped a diverse range of businesses. For American Dixie, Inc., which produces stainless steel kitchen equipment, SVI provided the financing and management expertise to save a sixty-year-old company from bankruptcy. Once locally owned, the Benton-based corporation was bought and mismanaged by a series of out-of-state companies. In 1988 James Carnahan, then a consultant to Dixie, tried to raise financing to buy the business and turn it around, but he was turned down by the banks. He se­cured SVI backing a few days before the company was due in bankruptcy court.

"For the first six months svi's involve­ment was very intense;' says Carnahan. "They helped us trim the staff, reduce operating costs, and change our market­ing and sales strategy. As a result, our revenues increased by about 75 percent over the last year:' In addition, the confi­dence inspired by svi's investment has enabled Dixie to secure financing from the state's Planning and Development Commission.

With Quantum Technologies, a firm that provides comprehensive services for industrial waste-water treatment, SVI

assisted a management buy-out that salvaged a company of forty-five employ­ees. "We had the knowledge of how to manage the company, of where the mar­kets were, and how we could grow, but we had no money;' says Don Harbour, a previous manager who is now co-owner. svi's $250,000 investment provided the working capital that Harbour and his partner needed to put their expertise to work. Since they took control, the com­pany has cut costs, expanded operations, and moved to larger quarters.

In Hot Springs, K-Tech produces a pa­tented, long-lasting ceramic coating for industrial machine pieces. A new com­pany that began last year with a $200,000 investment from SVI, K-Tech achieved profitability in its fifth month of opera­tions and is expected to grow to $30 million in sales over the next seven years. "We knew the potential for our product was enormous;' says Richard Smith, K­Tech's chief executive officer. "But SVI

was the only financial institution that was willing to take a chance on us. They're

giving small entrepreneurs the oppor­tunity to take their ideas into the marketplace, and we haven't had that in Arkansas before:'

Stephanie McHenry-Downing, an SVI

investment manager, has worked on ex­panding the organization's minority business financing. "There's a percep­tion among blacks that white financing has historically worked against them in this state, and that's led to a strong desire to keep total control over an enterprise;' 9he says. "So it's difficult for an equity in­vestor to get through the door:'

Another challenge has been finding minority entrepreneurs who have the necessary management experience. "Minority entrepreneurship in Arkansas is rooted in black Main Street-small businesses that serve minority customers in a limited area-and in general at SVI

we're looking for deals that will have a broader impact;' says McHenry­Downing. A native Arkansan with an economics degree from Dartmouth, McHenry-Downing, twenty-seven, con­siders herself part of a generation of black college graduates who see "capital­ism as a path to equality-get out there and compete head on and try to be the best:'

As a result of her outreach, the number of minority applicants for SVI investments has jumped from two in its first six months to nearly twenty in the same length of time since then. She is cur­rently working on a deal for a minority­owned mobile power-wash business that would service company fleets in Little Rock and, eventually, throughout the state. Says McHenry-Downing: "There's a growing awareness in the black com­munity of the importance of businesses with a broader reach as an opportunity for success:'

As it expands, sv1 expects to become more aggressive in seeking out new deals and improving the skills of local business operators so they can qualify for other sources of financing. But it is also seek­ing to have a more profound long-term impact. Explains Doose: "The immedi­ate goal is to increase the rate of enter­prise formation and survival. In that con­text, we're counting how many deals we do and how many jobs are created. But ultimately we're trying to hold ourselves to an even higher standard, to measure

transformations instead of just transac­tions. We want to see changes in attitude -people beginning to see themselves as entrepreneurs, of being capable of creat­ing a business, and beyond that a business that is not just local but with a regional, national, or even international reach:'

Idealism and Economics Unlike Southern, which began with ma­jor financial backing and the support of important players in the development world, the Center for Community Self-

our goal was to change the world;' says Eakes.

Former activists in civil rights and women's causes, the center's team of law­yers and management experts set out to transfer the political gains of these move­ments to the economic arena. But blazing new trails proved to be a slow, painstaking process marked by false starts, failures, and frequent shifts in strategy. Says Eakes: "When we first started we had lots of answers, but none of them had been tested by practical ex­perience. A full 50 percent of them

Donald Harbour, Vice President, Marketing, of Quantum Technologies, Inc. (left), and Jeff Doose, President of Southern Ventures, Inc., in a facility that will be renovated to accommodate Quantum's expanded operations.

Help in North Carolina was started by a small group of idealists with little more than a powerful commitment. The cen­ter is a striking example of how a few people with a vision can make a difference.

Since it began in 1980, the center has evolved from a small nonprofit advocacy group into a statewide force for economic change and an internationally recognized organization, which the United Nations has named one of the twenty most suc­cessful economic development groups in the United States. Founders Martin Eakes and Bonnie Wright still recall the days when their car was their office, and the center's work was supported by Eakes's earnings from his law practice. "We were young, green, idealistic, and

proved wrong. We needed to experiment -and fail-to find out what would and wouldn't work:'

In North Carolina, nearly half of the population is rural, and 19 percent of these households are below the national poverty line. Over the last decade the state has lost more than 1,000 manufac­turing plants, mostly textile mills located in rural areas where low-income workers have no other job opportunities.

The center's original strategy was to help workers who faced unemployment to buy back factories that were about to close. The idea, new to North Carolina, also contained promising social compo­nents. Creating employee cooperatives would not only save jobs, but also bring black and white workers together in a

common enterprise. But after several years of working with

scores of employee groups to determine the feasibility of each potential ownership conversion, the center con­cluded the plan was a mistake. "We discovered that in most cases there was a very good reason why the factory was closing, and it made no sense to try to keep it alive;' says Eakes. "It's not em­powering to start a business that can't survive:' Trying to bridge the "commu­nication gap between white and black;' Eakes adds, also proved difficult.

The center shifted its focus from large plants to smaller family-owned busi­nesses with retiring owners, and succeeded in getting fifteen worker­owned companies off the ground. De­spite intensive technical and managerial assistance from the center, two-thirds of these failed within a few years. "Our as­sumption;' says Eakes, "was that low­income and minority people had been excluded from business ownership for so long that all we needed to do was open that door with some financial investment and the rest would fall in place:'

But there were unexpected difficul­ties. One problem was the lack of experienced managers. Committed to the principle of workplace equity, the center believed managers could be trained on the job rather than recruited from elsewhere. It soon discovered that companies require strong leadership to succeed, and it takes years to develop those skills.

Another problem was obtaining con­ventional financing for worker coop­eratives. Spurred by the frustration of trying to find lenders for these projects, the center, says Eakes, "got the crazy idea of starting a bank:'

Social-Purpose Lending Launched in 1984, the Self-Help Credit Union and the Self-Help Ventures Fund transformed the Center for Community Self-Help into a statewide development lending institution. Like the banks run by Shorebank and Southern, the state­chartered Self-Help Credit Union pro­vides insured savings accounts and uses deposits to finance low-risk loans. Since its establishment, the credit union has tripled its deposits every year and now continued on p. 16 9

16

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DEVELOPMENT BANKING continued from p. 9 has an asset base worth $14 million. The Ventures Fund, with nearly $5 million in assets from foundation and church grants, lends money to riskier projects, including worker-owned enterprises and small businesses owned by minorities, women, and nonprofit gro.ups.

Today worker-owned companies ac­count for only 30 percent of the center's lending, and they are selected according to rigorous standards of feasibility and management expertise. Projects range in size from a clothing factory owned by sixty-five minority women to an outdoor recreation center owned by 275 employ­ees. Other businesses assisted by the center include a natural foods cooper­ative, a smail steel manufacturing plant, and a minority, family-run restaurant and convenience store. "The idea behind our lending;' says Eakes, "is to have clients who by the end of the process are bank­able borrowers:'

When making an investment choice, the center·considers not only a venture's prospects for success but also its social impact. Does it provide economic oppor­tunities for nontraditional borrowers or perform a useful community function? Sun Shares, for example, is a nonprofit recycling operation in Durham that has used a $100,000 loan from the center to purchase trucks and other equipment to carry out curbside collections and estab­lish ten recycling centers around the city. Its first year has been so successful that Sun Shares recently won a three-year re­newal of its city contract, expanded its staff from two to twelve employees, and has become a statewide model for com­munity-based recycling.

Based in Durham, with branch offices in Charlotte and Asheville, the center now has nineteen employees and is serv­ing a broad range of needs. A key feature of its program is making home ownership more accessible to low-income families. Studies show that a major barrier to mi­nority business ownership is the Jack of private assets. In orth Carolina, there is a ten-to-one disparity in the net worth of white and black households, due mostly to the difference in home ownership patterns. Seventy percent of white households own their homes compared to 30 percent of black households.

Enabling more minority residents to

buy homes, the center concluded, would have multiple benefits. According to Bill Bynum, the center's associate director for education: "Owning a home gives you a vested interest in preserving the commu­nity. Your kids learn about the responsi­bility of mortgage payments and home maintenance. And it provides the equity that makes you more likely to qualify for a business Joan:'

Over the last two years the center has made loans to about 150 first-time home buyers; mostly minority single mothers

lost her job. Although both returned to work, they were turned down by five fi­nance companies before a friend referred them to the Self-Help Credit Union. By that time, they were two days away from losing their home. Says Gibbs: "We worked extremely fast and extremely long for those two days to get all the pa­perwork done, and on the day their house was to be sold we had the check ready:'

With assistance in financial planning from the credit union, the Joneses have

Farmer Donald Stokes in his field of popping corn in Clinton, N.C. , used a loan to expand and diversify h1s crops.

who would not qualify for conventional mortgages. The center plans to increase the number of low- and moderate­income mortgage loans to 500 per year.

Lori Gibbs, the center's home mort­gage coordinator, came to the credit union after eight years of working in commercial banks. "I grew up in low­income housing, and I was determined to learn about economics from the other side;' she says. "But my bank jobs con­vinced me that the folks who need the money the most are not the ones who get it. I decided there had to be a better way to assist people:' At the center, Gibbs not only works with first-time home owners, but also helps clients in more desperate situations.

Robert and Mary Jones were facing foreclosure on their house when they ap­plied to the credit union for a loan. They had fallen behind in their payments when Mr. Jones became ill and his wife

had no problem meeting their repayment schedule. The 11 percent interest is much less of a burden than the 18 per­cent charged by their previous finance company. "They've been very support­ive and encouraging here, giving a lot of personal attention;' says Mrs. Jones. "It's so reassuring to deal with people who don't treat you like a number:'

Convinced that even a marginal change in a bank's lending policies can make a big difference, the center is hop­ing its programs will influence other financial institutions. With mortgage loans, for example, the center uses a looser debt-to-income ratio for borrowers than conventional banks. So far, the cen­ter's repayment rate has topped the banking average.

A new program of microenterprise lending will provide another vehicle for this message. The center, which helped obtain $500,000 in state funds for the ex·

periment, will work with the North Carolina Rural Economic Development Center to launch the program in five counties. The Self-Help Credit Union will service all the loans and provide training and technical assistance. "Micro­credit loans are very small;' says Eakes. "What's critical is how much people can learn:'

To inform state financial policies, cen­ter staff members have shared with legislators their experience with commu­nity and minority credit unions. The center is also part of a coalition of organi­zations seeking to get local financial institutions to disclose their business lending patterns. "Depositors have a right to know where their money is

"The banks turned me down because they said /lacked experience with other crops, even though I've been a farmer for sixteen years."

going;' says Eakes. "We feel that many would choose to have a slightly lower re­turn if necessary in order to place their deposits with a bank that was inve~ting in the community:'

To expand its reach, the center is forming partnerships with government and private groups in a diverse range of projects. Joint ventures have included a group home for emotionally disturbed girls, an emergency shelter for homeless families, and a house for people with AIDS. The center is currently assisting a federally funded housing program in Charlotte, N.C., which enables families living in subsidized housing to buy their homes at cost through the Self-Help Credit Union.

The center is offering its financial ser­vices and expertise to other groups as well. The Coalition on Farm and Rural Families, a nonprofit agency that assists black farmers in the state, has received help from the center to set up a revolving loan fund to extend credit for crop diver­sification, equipment purchases, and other farming needs. The coalition is hoping that its small loans will help keep minority farmers in business. At the cur­rent rate of farm loss, studies reveal,

there will be no minority farmers left in North Carolina by the end of the cen­tury. The revolving fund, financed with initial capital from the state, is based at the Self-Help Credit Union, which proc­esses all the loans and provides coalition staff with training in formulating lending policies.

"It can be overwhelming for a small or­ganization to have to create a loan pro­gram from scratch;' says Katharine McKee, the center's associate director. "With our credit union handling all the administration and servicing functions, the coalition can continue to concentrate on what it knows well-providing man­agement and technical assistance to small-scale farmers and assessing what kinds of loans make sense for them:'

Donald Stokes, a creative and commit­ted farmer, was the only one of eight children to stcty on the family farm. For years he tried to get financing to diversify his crops beyond corn and soybeans, which pay too little to support the farm's operations. Says Stokes: "The banks turned me down because they said I lacked experience with other crops, even though I've been a farmer for sixteen years:'

Stokes, who has a college degree in agriculture, finally got a loan from the coalition's new revolving loan fund. He now grows more profitable crops like sweet potatoes, pickling cucumbers, and popping corn, and his success has brought additional financing from the same banks that previously turned him down. Stokes has also been able to put some of his entrepreneurial ideas into practice. Having organized cooperatives of black farmers to raise rabbits, he ob­tained a loan from the Self-Help Credit Union to open a local market where the rabbits can be sold.

Increasingly, the center is assuming a statewide coordinating role, connecting economic development programs with public and private resources. "We see the center as a bridge between those with resources and those without;' says Eakes. To assist the center's expansion, the North Carolina state legislature has provided the organization with $4 million over the last two years.

The center's growing network of part­nerships serves another purpose as well. According to Eakes, action must be cou-

pled with policy advocacy to have the greatest impact. "Working to bring small changes in large institutions will affect many more people than we can reach on our own. The more we do, the more these projects become a megaphone that enables us to speak louder to financial and government institutions about what can and should be done to benefit low­income communities:'

A Long-Term Process By testing the potential of development lending to improve economic conditions, the Southern Development Bancorpora­tion and the Center for Community Self­Help are discovering that building new models is a long-term process with no set formulas. Although Southern, for exam­ple, is based on ideas developed else­where, it is evolving into a program with its own special characteristics. "The real challenge is shaping an organization to its environment, because none of this is cookie cutter;' says Jeff Doose. "You do a lot of hand-crafting. The most experi­enced of us at Southern are having new experiences on this project:'

One lesson has already emerged. Dif­ferent kinds of banking instruments can become effective, independent tools for development. "The key is to have a depository institution that's federally in­sured so it can attract large numbers of socially motivated depositors, together with unregulated funds that can experi­ment with riskier ventures;' says the center's Katharine McKee.

Adds George Surgeon of Southern: "Having a permanent capital base allows us to experiment. We can try something out and if it doesn't work we can try something else. With development work, nothing is written in stone. If you read Shorebank's initial study report from 1972 you can see how different things turned out than they had anticipated. There was a lot of trial and error, a lot of heartache before they began to get re­sults. The same is true of Southern. We can already see how our original expecta­tions are being altered by experience. We're constantly adapting and changing. The purpose remains the same, but the strategy and tactics vary from day to day:' •

-THEODORA LURIE 17