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| The Basics | Community investing spreads the wealth
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Investors and savers like you are helping people around the world solve problems and pull themselves out of poverty -- while earning a return on their good works.
By Liz Pulliam Weston
Mobile-home owners in New Hampshire had a problem. The rented ground beneath their manufactured housing was growing more valuable, and landlords increasingly were selling out to developers. Residents who wanted to buy the land couldn't get mainstream lenders to give them the time of day.
John and Dale Mayer of Sandwich, N.H., had a problem, too. They had cash to invest, but they wanted their money to make a real difference in their home state.
Community investing, in the form of the New Hampshire Community Loan Fund, helped solve both problems. The Mayers contributed $10,000 to the fund in 1986. Their money, combined with contributions from other socially-minded investors, was loaned to cooperatives so they could buy their mobile-home parks. As the loans are paid off, the investors earn a small rate of return -- 3% to 4%, typically -- and their money can be lent out again to fund other projects.
"We were in the fortunate position that we didn't have to get the maximum interest rate on our money," said Dale Mayer, now a widow and a fund board member. "And we were very excited at the idea of being able to put our money to work where it would help people."
What's more, the Mayers and other investors could visit the projects they helped fund, and watch as residents took pride in fixing up their homes, repairing neglected sewer systems and paving roads that had been muddy dirt ruts.
"I took (other investors) out on a tour and it was a revelation to them," Mayer said. "The people who live there are the nurse from the hospital, a police officer, a teacher. They had a community that they didn't want to leave."
Serving the underserved
Community investing has grown from a few scattered enterprises in the early 1970s to a rapidly expanding corner of the financial-services world. Private, nonprofit groups and financial institutions now fund about $20 billion worth of projects in underserved communities in the United States, and billions more throughout the world, said community-investing expert Mark Pinsky. Investors include individuals, foundations, corporations and churches or other faith-based groups.
The idea is to get money in the hands of people currently ignored by mainstream lenders, who can use the cash to expand businesses, build day-care centers, buy homes and otherwise improve their lives.
"Our focus is really to serve people outside the economic mainstream," said Pinsky, president and CEO of The National Community Capital Association, which represents a number of community-development financial institutions dedicated to revitalizing urban, rural and reservation communities. "Our investors are willing to accept a slightly lower rate of financial return to get a higher rate of social return."
The amount of return, and risk, can vary widely:- Investors can deposit their cash in market-rate, insured deposit accounts at community-development banks and credit unions such as ShoreBank in Chicago or the Santa Cruz Community Credit Union in California. The financial institutions then put the money to work in their communities through low-rate loans for disadvantaged borrowers.
- Those who want potentially higher returns, with potentially higher risk, can invest in mutual funds, like those from the Calvert Group, Domini Social Investments and Parnassus Investments, that direct some of their investments to community-development projects.
- Or investors can participate more directly by contributing to loan funds, like the New Hampshire fund and Oikocredit, an international fund supported in part by the World Council of Churches.
- Another option: community-development venture capital funds that invest in job-creating businesses.
(For a complete list of resources and options you can visit the community investing Web site run jointly by the Social Investment Forum Foundation and Co-Op America.)
Low default rates
Only the insured deposit accounts completely eliminate the risk of losing money, but Pinsky said community-investment groups pride themselves on their low default rates. The institutions in Pinsky's group, for example, have a combined net charge-off rate of about 1%, comparable to that of mainstream lenders. Oikocredit's default rate is higher, about 5%, thanks in part to fallout from the 1998 Asian currency-devaluation crisis. So far, the groups have been able to make sure defaults don't affect their investors' bottom lines. Investors might not get their promised return, Pinsky said, but they've gotten their money back.
"To date, we have not lost a penny of investor principal," Pinsky said. "We specialize in projects where the perception of risk is higher than the actual risk."
For example, community-development institutions often provide mortgages to low-income borrowers who were turned down by other lenders because of their bad credit. The institutions have discovered that they can find good credit risks when they remove unpaid medical bills from the credit-scoring equation.
"A lot of the people in low-wealth areas are very hard-working and they pay their bills," Pinsky said. But they're often uninsured and unable to cover soaring medical bills from an accident or illness.
"If you remove the unpaid health-care bills (from their credit scores), they often qualify for prime credit," he said.
Unique loans for unique situations
In a way, community lenders are using the same, case-by-case criteria that banks once did, before credit scoring took over the industry.
Businesswoman Judy Trabbold got a $50,000 loan from The Progress Fund to expand a thriving natural-products shop in Donegal, Pa. -- and to renovate the 200-year-old log cabin in which it was located. The mainstream banks "didn't want to take the risk," Trabbold said, but The Progress Fund "believed in my character, they believed in my work ethic."
In other cases, the amounts needed are so small that traditional lenders can't be bothered:- Dan Bishop, who runs a gutter-installation business in New Durham, N.H., got a $500 loan from MicroCredit-NH to attend a trade show.
- Corazon Endonela, a woman in the Philippines, borrowed $35 from a "micro-lender" funded by Oikocredit to buy a sewing machine and materials to make slippers. She now supports her family and provides jobs for others in her community.
- Residents of low-income Chicago and Detroit neighborhoods need relatively small sums to rehabilitate their houses. ShoreBank not only loans the money, but the conservation-minded community-development bank also gives homeowners free energy audits and provides low-cost financing for conservation-related improvements. In addition, borrowers get a new energy-efficient refrigerator for free. "One resident borrowed $2,800 for improvements," said ShoreBank official Jean Pogge. The energy-related improvements "added $25 a month to his loan, and he's saving $45 a month on his energy bills."
Among the big supporters of community investing are church and other religious groups. ShoreBank specializes in deposit accounts and loans for faith-based institutions, for example, while Oikocredit USA channels the investment funds of a wide variety of Christian churches. The largest contributor to the organization's U.S. arm is the Presbyterian Church, which has $3.4 million at stake, said Terry Provance, executive director of Oikocredit USA.
Religious affiliation isn't required, of course, but a desire to help others is. You can get higher returns with more conventional investments, investor Mayer explained, but perhaps not the same level of satisfaction. After her husband died, Mayer contributed another $10,000 to the New Hampshire fund and she has no plans to make any withdrawals.
"I like the idea of the money being used over and over and over again," she said, "to make a difference in how people live."
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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