Bootstrap Banking

For decades, the federal government has tried in vain to bring entrepreneurship to the poor. Now, a small Chicago bank may have found the answer in -- of all places -- Bangladesh

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A NONPROFIT AFFILIATE OF AN Arkansas bank-holding company will soon make its first two business loans. The loans will be small, the recipients poor. Contrary to all the rules of banking, the loan officers will require no collateral. They will require no specific debt-to-equity ratio and no specific return on sales -- in fact, they won't even inquire about these routine numbers. They will ask only that the recipients meet regularly with three other members of a peer group they have formed, to help one another. After two months, if the first two loan recipients have made their payments on schedule, two more members of the group will get loans. If those two meet their payments, the fifth member will get a loan.

Thus quietly will begin the most radical experiment in rural economic development since the Tennessee Valley Authority.

The loan program, called the Good Faith Fund, is one part of an ambitious strategy mapped out by two strange bedfellows, the Winthrop Rockefeller Foundation, in Arkansas, and the South Shore Bank of Chicago, a subsidiary of the Shorebank Corp., a bank-holding company. Calling themselves the Southern Development Bancorporation, the two partners will buy a bank, start a real-estate development firm, provide capital for start-ups, train nascent entrepreneurs, and recruit a staff of "enterprise agents" -- people who can originate deals, bring public and private resources together, and work with new companies.

The goal is nothing less than the reinvention of rural economic development. Since the 1950s, when Winthrop Rockefeller was chairman of the Arkansas Industrial Development Commission, Arkansas has been a leading practitioner of the standard model of rural development: using public subsidies to recruit new plants. The practice, known as smokestack chasing, has created jobs. But, like the Tennessee Valley Authority, it has kicked off no self-sustaining growth process -- no spin-offs, no innovative products or services by employees going out on their own, none of the interaction between those with capital and those with ideas that sparked Silicon Valley and Route 128. Just the opposite, in fact: the textile and metalworking plants that came to Arkansas for cheap labor in the 1960s are ocean hopping now for even cheaper labor, leaving devastated, one-company towns.

The Bancorporation will deviate from the old model in two major ways. First, it will nurture new and homegrown businesses rather than recruit large firms from out of town. By providing capital, entrepreneurial training, management and marketing assistance -- even help with real-estate development -- it will try to kick off the kind of chain reaction in which entrepreneurs invest in new products and services, make a profit, and continue investing.

The second departure is the virtual absence of government involvement in the program. Behind the fusion of a Chicago bank and an Arkansas nonprofit foundation lies a growing movement that uses entrepreneurial methods to attack social problems. These "public service entrepreneurs" want to help solve what seems like an intractable social problem, and they believe that the discipline of the marketplace is essential to their success.

The Arkansas group is still shopping around for the right bank, but it has already attracted the capital it needs. In addition to a $5-million pledge by the foundation, the Bancorporation has received commitments to buy $2 million in common stock from private investors. They include Wal-Mart Stores Inc. founder Sam Walton, listed by Forbes as the richest man in the United States, and his family; Systematics Inc., an Arkansas-based company that provides data-processing services to banks and financial institutions; and Arkansas Capital Corp., a business lending operation that uses both private and public money. "We're real enthusiastic about the potential of this project," says Rob Walton, vice-chairman of Wal-Mart Stores. "The key to making anything a success is having the right people involved. You wouldn't necessarily think that having a bunch of folks from Chicago come to rural Arkansas would be the best way to succeed, but I think these particular people have a good shot at making it go -- because of who they are, and because of their experience."

Who are these people from Chicago? They are bankers and activists who decided, back in 1973, that the best way to revitalize a declining inner-city Chicago neighborhood was to buy a bank and begin investing there (see box, "A Tree Grows in Chicago," next page). Credit was unavailable to residents at that time, and the neighborhood was badly blighted. Into that cauldron South Shore Bank has poured $76 million in loans -- much of it to people who had never before borrowed from a financial institution.

The rest of the Shorebank family -- a real-estate development firm, a venture capital company, and a community-development corporation -- has channeled another $51 million in public and private funds into the community. A third of the neighborhood's apartment buildings have been rehabilitated, tax delinquencies have fallen sharply, and the real-estate market in South Shore is as active as in any other part of the city. A neighborhood that was once headed for the bottom is on its way up.

The public-service entrepreneurs at Shorebank didn't expect to make much money from this success -- and they don't. The first 10 years were extremely tough. Now, default rates are under 2% and profits top $1 million, about average for banks of comparable size. But the Shorebank Corp. has never paid a common-stock dividend, and the investors' equity is worth much less in real dollars than it was in 1973. This is fine with its chairman, Ronald Grzywinski, and his investors. Their objective is to revitalize the neighborhood, not to maximize profits.

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