Micro financing helps local investors maximize social impact

Many people have heard of the 2006 Nobel Peace Prize winner Muhammad Yunus and the Grameen Bank he founded that gives small or "micro" loans that help impoverished people start businesses. Winning the award attracted much needed limelight to micro-financing, an industry that his bank started in Bangladesh in 1974. That industry has spread worldwide and now has strong advocates in Michigan and the Traverse City area.

Simply put, micro-financing or micro-credit is a small business loan given primarily to groups of women living in poverty. Average loans are $200 (ranging from $25 to $1,000) and typically finance tool purchases. The groups work together to make sure that loans are repaid.

Erik Falconer, chief investment manager of the Falconer Group in Traverse City, has been working in micro-financing for two years. His firm helps investors develop financial strategies to support their personal missions as well as their financial goals.

"Basically, we're talking about 'unbankable' individuals. Traditional resources aren't available to them."

Falconer has witnessed micro-financing first-hand. Last December he accompanied Donna Katzin, the executive director of Shared Interest (an organization focused on launching small businesses in South Africa), to a trout farm owned by agricultural laborers. Loans secured by Shared Interest helped the farm sustain itself. Now the company produces 10 percent of South Africa's trout and even exports to Asia and Europe. It expects to support itself completely in three years. Katzin estimates that $380,000 of its investments come from Michigan individuals and institutions.

Falconer collaborates with a non-profit organization in Nairobi, Kenya to help connect investors with borrowers. These colleagues, who lived in Traverse City before returning home to Africa, teach potential borrowers how to go through the process of applying for the micro loans.

During spring break, Erik and Leslie Falconer, along with their two children, took a delegation of potential micro-financing investors to Kenya's slums, visiting schools, orphanages and kids' sports areas.

Extreme poverty can be insurmountable in ways Americans can't understand says Falconer. He explained how African women without access to feminine products stay home several days each month, making them unreliable employees. Micro-financing provides inventory and other support for women to sell these products door-to-door in a culturally acceptable and affordable way.

Discovering a viable micro-finance opportunity requires keen sociology skills.

"Deciding who's capable of providing a return is a very hands-on process," says Falconer.

"More importantly," Katzin of Shared Interest added, "investors lend small amounts to a large group of people. If one member of the group can't pay her share, the others are responsible for covering the difference. So they support each other's businesses and work together to solve problems."

Justin Conway, sales and information officer for the Bethesda, Md.-based Calvert Foundation, which received the Fast Company/Monitor Group Social Capitalist Award for 2006 and 2007, says women far outweigh men in micro-financing in terms of repayment and cooperation. Micro-finance institutions have found that women's repayment rates are much higher than men's, making them a more sustainable investment. Also, women spend more of their income on their households, thus improving the living situation for the entire family. And finally, women are often easier to work with, and work well in cooperation with others to guarantee the repayment of loans.

Emerging trends

Awareness and interest has been building, especially with the added publicity of Yunus winning the Nobel Prize and the United Nations declaring 2005 the international year of micro-credit. Falconer sees growth moving toward a business level above the one-person enterprise, such as a loan that would support a coffee shop employing several people. He believes there would be better economies of scale and less administrative costs. Subsequently, investors might get market-rate returns, attracting even more capital.

"Currently micro-financing attracts someone interested in philanthropy that doesn't want to sacrifice their retirement," says Falconer. "Building micro-financing opportunities with market-place returns-that's where we're charging ahead."