Continued from my posting under the "crime"
topic.
How to set up a microenterprise lending system and start a bank.
1) Find a local credit union or
local bank whose management are willing to agree to the
project.
2) Set
up an account for this purpose.
This can be done by any legal
entity formed for the purpose.
3) Solicit funds from whoever. All the money gets
deposited to the account.
Bookkeeping keeps
track of who's in for how much, in
case someone wants to exit the
system and withdraw
their funds (with simple
savings-account
interest). The
minimum to
shoot for
should be
$120,000.
Better, shoot
for $250,000
which is the
limit of a
single FDIC-insured
deposit
account. The
targets can go
higher as more
FDIC-insured
deposit
accounts are
opened.
4) When the target amount is
reached, it gets used to
tie down a secured line of
credit with the bank or
credit
union (or more
than one as the case
may be). The
secured line of credit
will probably be
somewhere in the
neighborhood of 60%
to 80% of the funds
on deposit, but
that's OK because it
serves a
specific purpose
(per (12)
below).
5)
At this point, go
into the 'hood
and the schools
and work with
existing local
organizations to
seek out young
people who have
entrepreneurial
smarts and who
are seriously
at-risk
of opting into
crime-world.
6)
The secured line of
credit is used for
lending to the
grassroots
microenterprise
startups.
7)
Work with groups
of kids to
develop viable
business ideas.
Do
the whole
business
planning
exercise with
them, teach
them how to do
it. Ideal
case is that the
first round of
these won't
depend on
renting
storefronts:
rent is a huge
expense and a
business-killer
unless gross
sales can ramp
up quickly.
Best
if the group
members can
continue to
live with
their parents
(to keep costs
down),
though this can't
be taken for granted,
and shared
housing
arrangements
may be needed.
8)
Each group
that qualifies
gets
signed for a
startup loan.
The loan is
actually taken
with the bank
or credit
union.
However, the
loan is
secured by the
funds in the
account under
(3) above.
This means
zero risk to
the local financial
institution,
and that's the
key to getting
their approval
for the whole
project.
9)
The agreement
between the
organization
and the groups
it funds, is
that 20%
of their
net profits,
goes back to
the
organization
to grow its
pile of
capital. This
is in addition
to repaying
the loan to
the local
financial
institution.
(VCs
are typically
looking for
30%, so this
is a better
deal for
the new
startups.) In
addition, the
founders of
these startups
are obligated
to help
with
outreach and
mentoring of
others, after
they
themselves
succeed.
10)
If a new
startup can't
make a loan
payment, the
money is paid
from
the secured
account. The
risk is
distributed
proportionally
across all of
the contributors
to the
account.
11)
Stay actively
involved with
each new
startup
through its
first five
years in business.
If
it survives its
first year, it
is most likely
to survive the
next four
years.
After
five years,
it
is likely to
continue
successfully.
12)
Per the
agreement with
the original
financial
institution(s),
once a startup
successfully
pays
off its
starting loan,
it becomes eligible
for comparable
credit
directly from
the
institution.
This is the
step that
leverages the
startup
fund to obtain
independent
credit for the
startups after
their first
couple of
years.
13)
At
this level the
system runs
steady-state:
its
ability to
fund new
startups is
limited by its
own funds.
But that will
change under
(16) below.
14)
Once the startups
start
succeeding,
their contributions
of 20% of net
will grow
the funds and
enable more
startups.
15)
Once there's an
asset pool of
a couple
million
dollars,
distributed
across a
number of FDIC-insured
accounts,
possibly at a
number of
institutions,
then it's time
to consolidate
all of that
money into one
entity, and
start a new
financial
institution.
This
is the point
at which the
community
organization
starts a bank.
16)
The new
institution
starts with a
decent chunk
of capital,
chartered for
small
business and
startup
lending. And
then it
becomes
eligible to
engage in
"fractional
reserve"
lending,
which
multiplies the
effective use
of its money.
If
the reserve
ratio
is
10% assets to
loans,
that means
$2
million in
cash can theoretically
produce
$20 million in
lending.
Note, 10% is
"conservative."
In
the US, the
actual number
is a
bit below 5%,
which means $2
million in deposits
can generate $40
million in lending
capability,
assuming that
each borrower
uses the new
institution to
hold its own
deposits (this
can be written
into contracts
with new
startups). Reality
is usually
substantially
below these
theoretical
maximums, but
any
multiplier is
a good
multiplier.
17)
Fractional
reserve
lending
is how banks
"print
money." It's
an enormous
engine for
economic
development.
But instead of
enriching a
small number
of investors,
plowing it all
back
into the
community enriches
the
community.
18)
Last but not
least, this
could be a
candidate for
a Kickstarter,
starting
at step (1)
above.
However,
100% of funds
raised should
go direct to
the initial
account and to
the lending
program: this
is not the
place to
generate jobs
for the organizers
themselves
(that may
take five to
ten years or
longer).
And, to get
back to the
original
"crime" topic,
when at-risk
kids start to
see real
opportunity in
starting
legitimate
businesses
or
getting legitimate
jobs working
for their
buddies, they
aren't going
to opt
into
crime-world.
But the
point of the exercise
isn't just to
lower
the crime
rate. The
point of the exercise
is to enrich
the community
so people can
flourish
rather than
barely
survive.
-G.