Profitability in Micro-Lending

[DRizzo2327 at aol.com]

In a message dated 96-03-27 21:16:01 EST, you write:

> On the second issue, origination costs, we probably
>have a lot to learn in terms of how to do community deelopment lending in a
>streamlined, efficient fashion.

Banks that we have worked with have been reluctant to lend less than
$100,000, and then only where well collateralized....obviously an
impossibility with my target group. On the other hand, once we established a
solid loan portfolio, they were willing to lend to us, but began to place
greater constraints on the underwriting criteria.........leading to a less
than desrieable lending performance from our charter perspective. Banks
acquire most of their overhead in legal and regulatory practices they are
required or desire to continue.......a micro-lender does not have to follow
suit..........

Dennis Rizzo
NJ Disability Loan Fund, Inc.
DCRiz@aol.com


This post transferred from the cdb-l mailing list

[DRizzo2327 at aol.com]

In a message dated 96-03-28 12:19:52 EST, you write:

>
>Instead of going to city governments and big banks to get subsidies, as some

>of the folks on the net propose, I'd suggest the U.S. groups go FIRST to the

>informal markets and figure out what they do right to stay in business.
>
>
>Liza Valenzuela
>internet address: lvalenzuela@usaid.gov

Liza....thank you........It is essential that micro-loan programs become
independent of external supports if they are to become the genesis agents of
new economic development among unbankable populations. Liza shows how the
leaders have done it. The Mafia makes loans all the time, to shady applicants
at best, and always makes profits. ???? (not that we should institute
leg-breaking as a late payment penalty) :-)

I am in the process of re-designing our program (we are a recovering
government-run loan program) to provide smaller, shorter term, broadly
collateralized loans. I am proposing to sell off our larger, more stable
loans to acquire more cash to pursue small start-ups.......I am proposing to
seriously loosen up our legal, loan and closing paperwork from what it was
under government "sponsorship".......I guess we'll find out how it works.

Dennis Rizzo
NJ Disability Loan Fund, Inc.
DCRiz@aol.com


This post transferred from the cdb-l mailing list

[LCDEW at aol.com]

In a message dated 96-04-03 22:23:41 EST, you write:

> Banks
>acquire most of their overhead in legal and regulatory practices they are
>required or desire to continue.......a micro-lender does not have to follow
>suit..........

Interesting point about overhead coming from legal and regulatory
requirements. I would agree that is a big part of their transaction costs,
but I don't know that it is really "most' of their overhead. I still say
it's tremendously hard to make money on loans under $50K unless you're
charging very high rates and doing very little due diligience.

Eric Weaver
Lenders for Community Development


This post transferred from the cdb-l mailing list

[DRizzo2327 at aol.com]

In a message dated 96-04-04 20:08:46 EDT, you write:

> I still say
>it's tremendously hard to make money on loans under $50K unless you're
>charging very high rates and doing very little due diligience.
>
>Eric Weaver

So......what large degree of stability in lending do we owe to the type of
due diligence currently practiced? As opposed to the resulting absence of
capitalization.......

D Rizzo


This post transferred from the cdb-l mailing list

[LCDEW at aol.com]

In a message dated 96-04-10 22:14:58 EDT, you write:

>> I still say
>>it's tremendously hard to make money on loans under $50K unless you're
>>charging very high rates and doing very little due diligience.
>>
>>Eric Weaver
>
>So......what large degree of stability in lending do we owe to the type of
>due diligence currently practiced? As opposed to the resulting absence of
>capitalization.......
>
>D Rizzo

Dennis,
I don't quite understand what you're getting at. Please clarify.

Eric Weaver


This post transferred from the cdb-l mailing list

[DRizzo2327 at aol.com]

Eric:

Banks and lending institutions currently spend a great deal of time and
effort assuring themselves that the people they lend to can repay the
loan.........still we see a LOT of defaults and foreclosures and bankers
getting nervous and raising the amounts of their "minimum" loans way out of
reach of those who need the money, adding points and fees, and demanding more
and more guarantees........all this is explainable based on current banking
philosophy and the fact that many commercial lenders are really subordinates
of large holding companies with a lot of short-term-minded shareholders. But
what it does is eliminate capital for the small and start-up business; that
which "supposedly" (according to all the talking heads) is the primary source
of new jobs and economic growth.

My comment is simply a feeling that all of the "due dilligence" talk in the
world didn't stop the savings and loan BS, which we all have to pay for so
the poor shareholders don;t lose out on their risky investments. The
difficulty people have accessing capital has not decreased the default rates
of banks, because they simply default at higher loan amounts or (as in the
case of Donald Trump and his casinos) can't afford to default the loan
because they would have to close the bank. Accountants clean it all up
annually.

We need risk capital from somewhere.....where would you suggest?

DCRiz@aol.com


This post transferred from the cdb-l mailing list

[U30013 at UICVM.CC.UIC.ED]

Though it is just in the planning stage, one possible source of risk capital
is a portion of earnings from pooled renter security deposits. In theory,
if Chicago's renters combined their deposits they woudl create a $250 million
Fund. A portion of the Fund's earnings could provide capital to community
development projects -- perhaps $2-5 million/year -- knowing that some of the
loans will not be repaid, but will serve other social purposes.

A loose coalition called the REACH Project is working on the idea.


This post transferred from the cdb-l mailing list