Bentley Students Try Microfinancing In Their Own Backyard

WALTHAM, Mass. — A group of students at Bentley University is trying to do something no students in the country have been able to do successfully: use a model for lending to the poor that has worked well in developing countries, but not so well in this country. The Bentley Microfinance Initiative is designed to make loans to poor entrepreneurs in the Boston area.

When Sarah Kovacic helped to create a micro-lending program at Bentley University last year, she learned that making small loans to poor entrepreneurs is easier in poor countries.

“You don’t have all those regulations, you don’t have the taxes” Kovacic says. “And also you’re not competing against WalMarts and Walgreens and your Targets and all of those. And so it’s so much easier for a new entrepreneur to start up a stand and sell their homemade clothing or quilts or something like that.”

The program being created by Kovacic and other students is the first one of its kind in the U.S. Tufts University has a $100-million microfinance initiative, but it’s for international loans. Bentley’s is the only one run by students, and the beneficiaries will be Boston-area entrepreneurs who can’t qualify for bank loans. The students have $300,000 to lend.

“All of us that started this have been really involved on campus before,” saysJoel Penney, a finance major from Cranston, R.I. “But the chance to do something that makes a difference in the community hasn’t really been there. To kind of get outside the realm of Bentley, it’s just a good feeling, and I’m glad that I can be a part of it.”

Penney and the other students are following in the footsteps of Mohammed Yunus, the Bangladeshi microfinance pioneer who founded Grameen Bank and won the Nobel Peace Prize three years ago. The students are working with professor Roy Wiggins, who initiated a course on microfinance this year and helped the students modify the Grameen model for the United States.

“Unfortunately,” Wiggins says, “the group lending model that Grameen made famous tends to be one of the mechanisms that does not migrate well, so the fact that you’ve got a group of women in a small village in Bangladesh that are probably fourth, fifth, sixth generation in a very tiny community, the group model works very well, because the peer pressure to perform and to repay is very strong.”

Wiggins says in Bangladesh, the downside for not repaying could be an inability to feed your kids, an inability to survive. In the U.S., he says, people can move away to avoid facing their obligations.

“The U.S. also has a couple other things like wage-paying jobs,” he says, “albeit maybe not great jobs, safety nets that come through aid and development agencies, food stamps, welfare, so you have some things that compete with starting your own business as a viable way of working your way out of poverty.”

Compared with other countries, the U.S. just isn’t a place with a lot of micro-businesses. Sixty to 80 percent of businesses in the developing world are enterprises with one or two employees. In the U.S., those small enterprises represent just eight to 20 percent of all the businesses. The students use Professor Wiggins’ microfinance class to brainstorm.

“And then there has to be a measure of success as to when did we achieve our goal?,” asks Eric Melody, a senior from Enfield, Conn., as he discusses with fellow students about how they can measure that a loan has been successful.

“When did we pull you out of poverty or when did we get your business on its feet to the point where not only are you benefiting but maybe other people in the community?” Melody asks. “When do we actually finish doing what we do? We give them a loan. We issue a couple more, depending on where they pay back. Their business starts going. And then when do we hand them off? It’s when they can actually take a loan from a commercial bank.”

Melody discusses with the class how they’ll choose the recipient of their first loan.

“What do you look at?” Melody asks. “Where they live? Maybe the demographics of that area? Where their business is located?”

“References of suppliers and customers,” Penney suggests.

“Friends and family to see what they think,” Melody adds.

“But I was thinking more along the line of like a college application,” Penny says. “You know how they’re a bunch of short answers, like: ‘Why do you deserve this loan?’ or ‘Why should you get into this college over somebody else?’ or something.”

The students decide that they won’t finance any start-ups, because the risk of failure is too high. They want someone who already has a business going, and wants the loan to grow that business. Joel Nadeau says the students would like to see something else, as well.

“We also looked for people that have had struggles in life,” Nadeau says.

They settle on a welfare mom turned entrepreneur.

“And so she has the passion and the drive to be successful,” Nadeau says.

Linda Joy dropped out of high school. Now she runs her inspirational publishing and conference business for women from a home office at the end of a dirt road in Lakeville, in southeastern Massachusetts. It’s in a new house built with the craftsmanship of an old one, overlooking Loon Pond. In the middle of her office is a refurbished oak teacher’s desk. On the wall hangs a dream catcher.

“I’ve had a lot of struggles in my life,” Joy says. “From welfare to battered woman to not good relationships.”

Joy started her first business, a consignment shop, when she realized that she and other welfare moms needed a cheap place to buy office clothes to go to job interviews. Soon she had three stores, but then her husband, from whom she was separated, became terminally ill and she went bankrupt paying for his medical care. But she was already thinking about her next business.

“I just kept having a dream about a magazine,” Joy says.

So she started one. Joy uses her magazine, Aspire, to reach women interested in how to succeed. They pay to attend conferences she organizes with inspirational speakers.

Joy needed to hire someone who could develop a sales strategy, and that’s where the students come in. They are lending Joy $6,000, which she is expected to pay back over two years. They’re charging 12 percent interest, which is the average rate for microloans in the U.S.

Joel Penney says the students hope to create a model that students at every college and university can replicate.

“We’re hoping that we can create something,” Penney says. “A process, a loan process, that’s so flawless and that’s so effective in the United States that we can spread it out to all the schools across the country — eventually have them start up their own clubs, and then, through that, you can alleviate a lot more poverty than you would be able to just through Bentley, so. We really just want to get a good system down and make it widespread across the country.”

But the students feel their program is not ready to be duplicated yet. Right now, they’re looking for new people to lend to. They’d like to make 30 loans at a time. In future loans, the students plan to charge an interest rate that will cover the default rate on the loans they make. But with one loan in place, defaults are still something they have yet to face.