Building Capital in the Inner City

The first panel session was titled ‘Community-Based Capital for Small Business Financing’. In the introduction, moderator Matt Reilein of JP Morgan Chase noted that an ICIC study found that 70% of inner-city businesses are undercapitalized, which provided excellent context for the discussion that followed.

Two ideas brought up by the panelists jumped out at me – Mary Houghton of ShoreBank’s talk about ‘social investment’, and Jonathan Brereton of ACCION Chicago’s discussion of the role, and challenges faced by, non-profit organizations.

ShoreBank, now part of the Urban Partnership Bank, emerged from Chicago’s long tradition of neighborhood-based political organizing. Founded in 1973, it believed that local deposits ought to be used for local loans. Interestingly, it found that the size of loans requested by small and new businesses was the biggest barrier to accessing capital for inner-city businesses (race and perceptions of poverty were second). The issue of size of loans was brought up later by another panelist, mentioning that conventional banks have generally not been interested in anything less than $25,000.

Houghton mentioned that ShoreBank eventually found a market amongst what she called ‘socially-oriented investors’, people interested in not just a financial bottom line, but a social (and environmental) return as well. Picking up on the theme of social good, Brereton talked about the problems non-profits faced. First, that many people don’t view them as businesses (for example, many loan programs exclude non-profits). Second, there is a stigma in many minds because they are government-funded (he made a great analogy debunking this by pointing out that Boeing’s biggest customer is the government). Finally, the lack of assets non-profits have makes it hard to access credit.

The related idea I take from these two is that an interest in social good can translate into an investment in the inner city, and low-income neighborhoods. My mind goes to the question of ‘how do we harness social good to build capital in the inner city’? Certainly, as citizens we all have a role to play. We can support financial institutions that practice good corporate social responsibility. We can invest in and support non-profits that work in community development, and in marginalized areas. Leaders and funders in non-profit organizations can take on capital and equity-building initiatives and social enterprises (and government programs can adjust to encourage this).

The role of credit unions and other Community Development Financial Institutions (CDFIs) is essential – co-operatives too. There’s precedent in my home province of Alberta (in Western Canada), which has a strong history and presence of credit unions. Credit unions and co-operatives really took root during the Great Depression, when the big banks wouldn’t fund farmers and other small organizations. Many large, locally-owned financial institutions trace their roots to the early decades of the 20th century, and their legacy continues today. The United Farmers of Alberta, along with Servus and FirstCalgary Credit Unions, show up amongst the province’s highest grossing private companies.

Community Development Banks, and CDFIs (including credit unions) can employ this approach to build capital in the inner city. Between an existing customer and business base in the neighborhoods, and a growing number of investors (myself included) who want to support companies that do social good, most markets should be able to support one, if not more, of these institutions.

There will, obviously, need to be a lot more done. But I see the under-capitalizing of inner-city businesses and neighborhoods to be something that we can start fixing right now, building on successful models, and people’s interest in doing social good (even while making money).

Cross-posted from the ICIC Blog.

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