Small Victories
Two Unusual Lenders
Show How 'Bad Risks'
Can Be Good Business

Chicago 'Borrowing Circle'
Uses Peer Pressure to Get
Enviable Payback Rates

Bank Uses the Personal Touch WSJ 6.23 0.1

By DAVID WESSEL

Staff Reporter of THE WALL STREET JOURNAL CHICAGO Dorothy Wallace would seem a lender's nightmare. Separated from her husband, she is on welfare with her two teen-agers. She hasn't held a steady job since 1984. She says her credit rating is "ruined by accounts I messed up."

Vivian Wilson wouldn't rank high on the typical banker's list, either. She operates a guard service out of a windowless brick ounding across from a burnedout storefront on a desolate stretch of 71st Street. When she ran into cash-flow problems, she discovered that the bank where she had kept money for decades was unwilling to lend to someone with hardly any collateral to put up.

But Dorothy Wallace and Vivian Wilson are proving to be flawless borrowers nowthanks to two Chi

cago institutions that see good bets in

Doing

gritty neighbor Business

hoods where others see hopeless cases. Ms. Wallace borrowed $800 from the Women's SelfEmployment Project, founded in 1986

to assist low-income women

in the

INNER

CITY

interested FOURTH OF A SERIES

in self-employment

as a way out of poverty. It is funded primarily by contributions and loans from foundations and corporations. Ms. Wilson arranged a $50,000 line of credit from South Shore Bank, a bank determined to prove that profit and social progress are compatible.

Credit is the lifeblood of any economy, but in America's inner cities it has largely dried up. Many bankers tend to view inner-city residents as lousy credit risks. But WSEP and South Shore Bank show that's not necessarily true. By putting a new spin on the old-fashioned technique of relying on personal contact rather than impersonal credit evaluations, the two institutions manage to get paid back at enviable rates.

WSEP depends on four other lowincome women in Ms. Wallace's "borrOWing circle" to make sure she makes her

loan payments on time. The gimmick seems to work. In three years of making loans of a few thousand dollars each to circles of low-income women without so much as a credit check-60 loans in aliWSEP hasn't had a single default.

The notion comes from Bangladesh, where the Grameen Bank pioneered the use of peer pressure as a way to assure repayment of the small loans it makes to landless vil. lagers, mostly women. Founded in 1983 by a visionary named Muhammed Yunus, the bank has hundreds of thousands of borrowers and a world-wide network of disciples. Although

WSEP sticks most closely to the Grameen model, other foundation-backed experiments in "microenterprise" lending are under way - with mixed results - in a dozen or so other pockets of poverty in the U.S., from a Sioux reservation in South Dakota to South Central Los Angeles.

South Shore Bank is more conventional. It specializes in loans many other bankers shun: loans to buy and renovate small apartment buildings in a handful of rundown Chicago neighborhoods and loans to novice minority entrepreneurs. The bank and its affiliates have financed the rehabilitation of about 30% of the 25,000 apartments in South Shore, helping to rescue a neighborhood that fell on hard times about 25 years ago as middle-income whites fled and lower-income blacks moved in.

Yet the bank has been consistently profitable, and its loan-loss figures compare favorably with those of similar-sized banks. Last year's losses were a respectable 0.67% of loans outstanding. It has been stuck with just one piece of real estate in the past three years.

Peddling Perfume

Part of its secret seems to be a willingness to make loans as much on character as on collateral. In a market where many other bankers see only trouble, South Shore has learned to discern the good risks and also to keep close tabs on them after they borrow. "We spend a hell of a lot more time... working with the borrower one-on-one," says Richard Turner, senior vice president for lending.

WSEP specializes in much smaller loans. Dorothy Wallace, for instance, bought perfume with her $800 loan from WSEP. Like door-to-door peddlers of old, she carries a shoulder bag full of cologne, lotion and perfume that she sells to steady customers in downtown offices and to strangers on the Chicago El.

Ms. Wallace began taking orders for the line of additive-free fragrances two

years ago as a way to supplement welfare checks, and used her loan to buy inventory so she could offer instant delivery. Since she began attending twice-a-month meetings of her WSEP borrowing circle - a combination of consciousness-raising and business training-she has begun to talk of opening an office and working her way off welfare.

For now, though, she concentrates on making timely loan payments. She owes $33.22 every other week, but pays $40 to cut interest charges. WSEP charges 15% interest on the one-year loan. Ms. Wallace is almost as grateful for the moral support as for the money, which helps explain why she and other women are so diligent about making their payments. "They gave me a chance to start all over again," she says. No Defaults

As they listen, the four other women in her circle - dubbed "Too Blessed" by its members nod in unison. One sells jewelry that she makes, and borrowed $600 for materials. A retired bank clerk sells handsewn lingerie and linens; she borrowed $700 to buy a heavy-duty sewing machine. A former Head Start aide, who borrowed $500, is selling custom gift baskets and peddling fruit on street corners and parks. A woman with four children of her own and four foster children hopes to learn to read and to get a day-care license. All five women live in Englewood, a neighborhood where every block has a boarded-up building, and two inches of bullet-proof plastic separates workers from customers at Kentucky Fried Chicken.

The "Too Blessed" circle works like all the others that WSEP has established. The five members choose two to get the first loans. The first two borrowers have to be current for six weeks and all five members of the circle have to have attended three meetings in a row before the third is eligible. Peer pressure is supposed to assure timely repayment.

And it does. In the past three years, WSEP has lent about $60,000 to 60 women without a single default; the late-payment rate is about 3%. By comparison, the American Bankers Association reports that the current delinquency rate is around 3.75% on bank personal loans and 3% on credit cards. "Peer support and peer pressure really serve as a good way to lower your risk," says Connie Evans, WSEP's director.

Beatrice Lynn Hardy, a budding graphic artist who borrowed $1,500 through another circle in the same neighborhood, recalls the time she bounced a $61.50 loan-payment check. Fearful that her misdeed would hurt another woman who was up for a loan, she frantically called the WSEP office and the would-be borrower to explain. This from a woman who describes her credit record with a silent "thumbs down."

Mixed Results

Results from other experiments with the peer-pressure technique are mixed. In rural Arkansas, a borrowing circle called the Good Faith Fund found it insufficient. In its first two years, the fund had a 40%

default rate, and it has since moved away from the classic Grameen model. "Peer pressure isn't as significant as it might be in a place like Bangladesh," says Director Julia Vindasus. "But the peer support is really important. It's a very isolating thing running your own business."

But managers of the Lakota Fund on the Pine Ridge Indian Reservation in South Dakota, who initially shunned the peer-pressure approach, now embrace it. In 1987, Lakota made 68 individual loans. More than half the loan payments were late; 28% of the money was never paid back. So Lakota began forming borrowing circles in 1989. After $26,000 in loans to 13 circles, the default rate is running around 7%. "You don't lose many loans," says Director Elsie Meeks. "Someone always knows where the borrowers are.'

Despite the obvious appeal of turning welfare moms into entrepreneurs, some people are skeptical that many poor women can escape poverty through selfemployment. "If my sister was on welfare, would I tell her to start a business? No." says David Shryock, South Shore Bank's vice president for commercial lending. "Then why should I tell some poor black woman on welfare to do it?"

Micro-enterprise funds, something of a fad in economic development circles, are also costly to run. In its circle fund and a separate, more conventional loan program, WSEP has lent a total of $200,000 to 200 women. But it spends more than it lends. Ms. Evans estimates that about $280,000 of its $700,000-a-year budget goes to running the two loan programs, and some of the rest goes for related overhead. In part, this is because WSEP is still experimenting, but it also reflects how costly it is to administer tiny loans.

$1 Million Contract

That's where South Shore Bank has an edge. Its loans are far smaller than those that big banks make, but at least they are in the tens or even hundreds of thousands of dollars. South Shore Bank is owned by foundations, churches and big corporations, the ultimate in patient capital, but it borrows and lends at a profit just like any other bank. Like WSEP, it makes loans to people who often can't get credit elsewhere, but its borrowers are typically working or middle-class.

Like Vivian Wilson. Her successful bid on a $1 million contract to provide security guards to the city of Chicago almost cost her the Star Security & Detective Agency Inc. that she inherited from her father. She hadn't realized how slowly the city paid its bills. After weeks of back and forth in the spring of 1988, the bank in which Ms. Wilson kept her accounts refused to make her a loan. To meet her payroll, she was dipping into her savings and was within two weeks of running out of cash.

She ended up at Mr. Shryock's desk at South Shore Bank. "That kind of receivable is hard to underwrite," he says today. "If there is a problem, you worry that the city will say it's not a valid receivable." The owners of bigger businesses put up personal assets in similar circumstances; Ms. Wilson

lished by a purchasing managers' group to help minority-owned business.

South Shore more often relies on the Small Business Administration for guarantees, but it rarely calls on government to make good on them. In three of the past five years, South Shore's loan losses (including losses on loans that were partially guaranteed by the government) were less than half the rate reported by similar-sized banks across the country. The recession took its toll in 1990 and 1991, though, hitting South Shore harder than banks that hadn't been as aggressive. Last year's 0.67% loan loss rate exceeded the 0.42% reported to the government by other small banks. Sour loans to three fast-food franchises and two auto dealers were to blame.

South Shore's lenders offer three explanations for their track record. They stick to neighborhoods and businesses they know, often relying on franchisers to provide borrowers with strategy and advice. They match the borrower to the deal, often steering an overly ambitious novice rehabber to a smaller building. And they are quick to pounce on borrowers who fall behind, and just as quick to locate buyers to get troubled borrowers off the hook. "Our motto is: Knock them down, but help

them up." says James Bringley, vice president for real estate and installment lending. He boasts that the bank writes off only about 1/20 of 1% of its real-estate loans annually.

Both Mr. Shryock and Mr. Bringley deny that their bank serves as a behindthe-scenes partner, helping novices to run their businesses. "It's not like we can't do lending in this neighborhood until we teach these 'ignorant people' what to do," Mr. Bringley says.

But particularly in real estate, borrowers say the bank has helped teach them the business. When plumber Leroy Jones and his wife, Josephine, began renovating apartment buildings on the south side, they met once or twice a month with other landlords at breakfasts sponsored by South Shore. "The one thing I really learned that has really stuck with me is not to be a softie," Mrs. Jones says.

Today, the Joneses own five buildings, all financed by South Shore. They say they notice how South Shore keeps close tabs on them. Their first building was purchased with a loan from another bank. "You know, I don't think they ever came by," Mrs. Jones says. "Mr. Bringley is always saying, 'I drove past your building. I see you put a new tree up.'