What do you do if you want to start a small business to bring in some extra money for your family? And if you have no credit history, are part of new resident population, or are unable to write a business plan, trying to borrow a small loan from a conventional lender is nearly impossible.
“There’s a reason why banks don’t make small loans,” said Mark Edelman, ISU economics professor and director of the Community Vitality Center. “It costs them about the same amount in staff time to do a $1,000 loan as it does a half million-dollar loan. That’s what has created this gap in the capital market and the reason for having microloan programs.”
Solidarity Microfinance
“A market analysis showed serving the needs of diverse low-income
populations with microcredit was something that could be useful in Des Moines. Local leaders and CVC spent a year developing a business plan for Solidarity Microfinance and another year doing the initial fundraising, and organizing the project. In November 2014 we launched the program.”
Solidarity Microfinance lends to people who want to start or expand an enterprise to generate extra income, but who are unable to get a loan from a bank because they have no or poor credit ratings. All loans are six-month loans, typically starting at $1,000. At the end of the six months, with good attendance and loan repayment, clients are eligible for a $500 increase in the next loan amount to grow their business, up to $6,000, the current maximum.
“It turns the banking concept on its head,” said Edelman. “We don’t use collateral; we don’t require a written business plan. Basically we require the women who participate — it’s primarily a program for women with families — to form a voluntary group with four other people in their neighborhood that they know and trust, who are also trying to start enterprises. The groups make the recommendations whether each member deserves a loan, that’s why there’s incentive for members to help each other.”
Afterwards, a staff member visits each person’s home during the orientation period. They assess how group members conduct themselves and what others say about them. Instead of financing based on collateral and balance sheet information, they’re making loans and developing credit underwriting based on character.
Members Work Together
Groups meet weekly to make loan payments, to make deposits into no-fee savings account with a local bank arranged by Solidarity, and to discuss their enterprises. A program staff person meets with them to help collect payments. Once a month, resource seminars are given for all of the groups to learn about accounting, taxes, marketing, or other challenges of mutual interest.
Solidarity Microfinance uses the methodology created by 2006 Nobel Peace Prize recipient Muhammad Yunus, for his work in developing the Grameen Bank in Bangladesh. Solidarity has a consulting agreement with Grameen America, a related nonprofit based in New York, and hired Grameen’s Alomgir Hossain to come to Iowa to direct the Des Moines program. He has 30 years of experience and was one of the first people that Yunus hired when he originally organized the Grameen Bank in 1983.
Since Hossain’s arrival in Des Moines in March 2015, more than 100 low income women have participated in Solidarity. All clients with loans approved in 2015 have made a 100 percent repayment and after six months, participants have established an average credit score of 694.
Program Coordinator Ana Mancebo said, “People with no credit history still need access to small loans to establish credit and to start or expand their microenterprises. The groups and networks created help to create stronger neighborhoods and communities with greater vitality.”
Solidarity Microfinance is a program of Iowa Community Capital (ICC), a 501 ( c)(3) nonprofit organization serving low income populations and underserved communities. Iowa Community Capital has a statewide board of ten members representing Iowa MicroLoan, Community Vitality Center, lenders, and leaders from Iowa’s metro and non metro communities, as well as, expertise from cooperatives, agriculture, local foods, and economic development. Edelman currently serves as the board chair.