It is convenient for Americans to think of Peru as the economic basket case of the hemisphere, yet de Soto asserts that it harbors a thriving shadow economy. On the other hand, the U.S. economy is seen as the most developed in the world. But de Soto's observations and the Denver taxi experience beg a provocative question. At what point does the U.S. economy begin to resemble Peru's, with entrepreneurs heading underground, driven by a system they deem not just arbitrary but corrupt?
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Access to Capital
Priming the Pump
What will hasten the "Peruvinization" of the U.S. economy is lack of access to capital at the grass roots. Although the mainstream entrepreneur complains about lack of access to capital, the fact is that lack of money rarely kills companies run by entrepreneurs who truly understand the game of business. On the other hand, a minority entrepreneur trying to break through and borrow money for the first time often hits a wall. That person would barely get inside the door of a typical U.S. bank, because the banking system is structured to serve the mainstream economy. High overhead and transaction costs mean that the same effort is needed to make a $100,000 loan as is needed for a $10,000 loan. More important, a $1,000 loan, which is what many grass-roots entrepreneurs could use, is simply too small, unprofitable, and risky for a bank even to consider.
Chicago's South Shore Bank is known for being one of the most active and creative banks in Chicago's inner city, yet banker Mary Houghton admits that South Shore, like other mainstream banks, is poorly equipped to help minority start-ups. It needs customers who are higher up the food chain. "We look for survivors, not people just starting out. We want to provide them with resources that will allow them to grow and prosper," says Houghton. "When a regulated bank tries to do business with somebody in a class and culture other than its own, it's almost an impossible interaction and not cost-effective for the bank."
Another Chicago bank trying to make that interaction work as cities like Chicago grow increasingly multicultural is the First National Bank of Chicago. It has aggressively expanded its franchise in the city, growing its base from 5 to 77 branches in the past eight years with the acquisition of some large but faltering savings-and-loans, which has taken it into some ethnically diverse neighborhoods. In one instance the branch manager turned her bank into more of a "currency exchange" that cashed paychecks and issued money orders because that is what many people in the Hispanic neighborhood expected the bank to do. Another branch arranged for payment of utility bills, with a large, official-looking seal stamped on the receipts, because that was what immigrants expected. At one branch on the city's North Side, the bank's employees collectively speak 46 languages.
First Chicago sees a lot of people with fledgling businesses and no track record as entrepreneurs. To those would-be entrepreneurs, the bank makes personal loans, home-equity loans, or credit-card loans in lieu of business loans. Says Ed Jacob, a community-banking officer with First Chicago: "This allows us to bypass the traditional business-approval process. We also have to assess profitability on a long time line. You've got to be looking out five years."
The bank uses intermediaries to help it reach into the community. One is Chicago-based Women's Self-Employment Project (WSEP), the largest nonprofit entrepreneurial-services program targeting low-income and moderate-income women in the city. Its executive director is Connie Evans. "Banks can't make money on small loans, and they require more support to help the lending process along," she says. "You seldom run into a financial institution, government-loan program, or even private organization that will finance a start-up."
Enter WSEP, which works mainly with start-ups. Evans sees a lot of people from whom banks would flee. Many of her customers have poor credit histories or none at all. They lack collateral. Many are on welfare.
WSEP lends money on the so-called Grameen Bank model, which is communally based and was first developed in Bangladesh. Borrowers form a "lending circle," consisting of perhaps half a dozen people. Each entrepreneur borrows funds in succession from the circle -- only after the previous borrower has repaid his or her loan. The Grameen concept uses peer pressure and support to help businesses get started and boasts a historically high rate of loan repayment -- nearly 100%.
At WSEP a lending circle involves five people. Evans believes that having the circle composed of just women imparts solidarity and a sense of security that might not result if a man were allowed into the circle and sought to dominate it. Members of the circle can't be related. If someone drops out of the circle, it must halt lending activity until the group replaces that person with an agreed-upon substitute.
WSEP has been operating since 1986, working with low-income and moderate-income women, 90% of whom are minorities. Since then WSEP has lent out nearly $650,000, with the average first loan being $1,500. When the first loan gets repaid and a client's business gets off the ground, she is eligible to "step up" to a larger loan. The lending circle's repayment rate is 100%.
