University-Sponsored Microfinance Initiatives in Depressed Urban Environments: A Case

StudyJP Krahel and Srikanth Ramamurthy

Loyola University Maryland

Abstract

Many American communities are plagued by a history of racial inequality and “redlining”,

defined as the practice of systematically denying minorities access to wealthier white neighborhoods,

resulting in perpetually disadvantaged minority communities within cities that might otherwise be

economically thriving. While redlining has been illegal for several decades, its legacy remains. This

divide leads to a cold-start problem: Members of disadvantaged minority communities who possess

business acumen and the ability to garner resources to make long-term investments eventually leave these

neighborhoods for greener pastures. Many of the historically disadvantaged communities, thus, remain

stuck in a vicious circle of poverty, lacking the means – either capital or human – to grow economically.

The busy York Road business corridor on the east side of Loyola University Maryland’s Evergreen

campus in Baltimore is one such “red line”. The income and racial divides between the wealthier east and

poorer west sides of this corridor are stark. To address this issue, Loyola University Maryland combined

corporate funding, a partnership with Kiva, and faculty and student engagement to build and nurture

relationships with businesses along the York Road corridor.

We categorize our potential business partners along three dimensions: community-mindedness,

trust (in this partnership), and fiscal discipline. While our sample size is small as of now, we believe that

all three attributes are necessary for a successful community partnership. Some business owners are

enthusiastic about helping their communities, but lack the financial prudence to prioritize long-term

growth over short-term needs. Alternatively, financially savvy entrepreneurs sometimes do not trust

outsiders bearing an offer of assistance. Still others have both trust and discipline, but see their

surrounding community as a source of profit and not a partner. It is a rare but valuable partner who

possesses all three attributes to lead to a successful relationship, and these partners must be actively and

judiciously sought out.

This paper presents a case study of business-university partnerships of the type described above.

We discuss student recruitment and engagement, business partner selection and relationship management,

capital budgeting methods, and potential legal challenges associated with community lending. This paper

benefits those institutions looking to implement similar concepts in their own communities, as well as

smaller community lenders seeking guidance on proper lending targets.

Introduction

Many American communities are plagued by a history of racial inequality and the practice of

“redlining,” by which minorities are systematically denied access to wealthier (and typically white)

neighborhoods, resulting in perpetually disadvantaged minority communities within cities that might

otherwise be thriving economically. While redlining has been illegal for several decades, its legacy

remains. Figure 1 shows home prices in 2017, organized by neighborhood, for Baltimore, Maryland,

USA.

Significant research has been done on both the causes (Aalbers 2006, Urban Studies 2003) and

effects (Zhang and Ghosh 2016) of redlining. A key outcome is a downward spiral of economic

depression brought on by confluence of several factors: once a neighborhood is racially segregated

(whether de jure or de facto), economically powerful businesses tend to abandon the area, paving the way

for usurious and otherwise morally questionable actors to fill the roles normally filled by reputable

institutions. Employment suffers due to lack of outside investment, nutrition suffers due to lack of chain

supermarket access, and education suffers due to a lack of property tax dollars available for school

construction, educator salaries and school resources. These and many related economic forces ensure that

the impact of redlining is felt long after the practice itself has been outlawed.

This divide leads to a cold-start problem: Members of disadvantaged minority communities who

possess business acumen and the ability to accumulate resources to make long-term investments likely

leave these neighborhoods for greener pastures. Many historically disadvantaged communities thus

remain stuck in a vicious circle of poverty, lacking the means – either capital or human – to grow

economically. The neighborhood bordering the east side of Loyola University Maryland’s Evergreen

campus in Baltimore along York Road is one such “red line” (see Figure 1).

Figure 1: Redlining along York Road in Baltimore, MD1

As a Jesuit institution, Loyola University had made many efforts to address this issue prior to the

initiative discussed in this study. Several involved food security, including the establishment of a farmer’s

market and the Fresh Crate Initiative, in which local convenience stores could purchase fresh groceries

from Loyola’s foodservice provider, enjoying volume discounts without needing to make volume

1 Courtesy of Trulia.com

purchases. Loyola students are also encouraged to volunteer during community cleanup days, serve as

mentors to local youth, and connect with local public schools.

What separates this program is its focus on local businesses. Loyola was given a significant grant

from a large national bank, specifically earmarked for local microfinance initiatives. Loyola partnered

with Kiva to channel this corporate funding and engaged faculty-student teams to build and nurture

relationships with businesses along the York Road corridor. The remainder of this paper will discuss our

experiences and lessons learned from interacting with students, business owners, and various other third

parties.

This paper presents a case study of business-university partnerships of the type described above.

We discuss student recruitment and engagement, business partner selection and relationship management,

capital budgeting methods, and challenges associated with community lending. This paper benefits those

institutions looking to implement similar concepts in their own communities, as well as smaller

community lenders seeking guidance on proper lending targets.

History of microfinance

Common themes in developing nations

While formal microfinance is a relatively recent development, there is a fair amount of literature

addressing its impact, particularly in developing nations. From Indonesia (Santoso and Ahmad 2016, Das

2015) and Bangladesh (Parvin and Shaw 2013) to Malawi (Lønborg and Rasmussen 2014) and Kenya

(Skovdal 2010) to Brazil (Hudon and Meyer 2016) and Peru (Silverberg 2014), the effects of

microfinance upon marginalized communities are a subject of continuous focus.

A common theme across much of microfinance research is its ability to change communities, for

better or for worse. Given its non-charitable nature, microlending can empower those to whom society

would traditionally ascribe diminished efficacy, especially children (Skovdal 2010) and women

(Silverberg 2014). It can also create a sense of community and shared ownership in spaces where

previously there was none (Hudon and Meyer 2016, Santoso and Ahmad 2016).

The reach and outcomes of microfinance are not universally positive, however. . Microfinance is

seldom able to come to the aid of those at the extremes of poverty and vulnerability (Lønborg and

Rasmussen 2014, Parvin and Shaw 2013). Since lenders cannot help but prioritize some applicants over

others, those with less wherewithal to take advantage of temporary funding may find themselves even

further stratified away from those with reasonable means and business plans. This stratification, coupled

with the tendency of microlending to empower women and thus upset a long-held social order (Silverberg

2014) may create more societal conflict.

Depressed areas of the developed world

While there are many studies documenting the efficacy of microfinance in developing nations, the

impact of microfinance in economically disadvantaged areas of advanced industrialized nations like the

United States remains understudied. This is in part because microlending and microcredit have only

recently gained traction in the developed world. Kiva, for instance, only began piloting its Kiva City

program in the US in 2011 (Todd 2014).

A close analogue to microfinance in the developed world is community banking. John Ryan,

President and CEO of the Conference of State Bank Supervisors, asserted that community banks are a

better indicator of the health of the US economy than larger banks because the condition of community

banks correlates more directly with that of their surrounding communities (Williams, Driscoll, Perry, and

Whitney 2014).

Community banking, however, is not a panacea, and can be fraught with political and

interpersonal complications (Andranovich 2007). Chami and Fischer (1995) find that community banking

is far more successful when offered to geographically immobile, homogeneous borrowers. As community

banks face greater default risks and a reduced ability to conduct due diligence, these two characteristics

help to reduce that risk. Immobility enables continuing observation, while homogeneity reduces the

variance within a bank’s loan portfolio vis a vis repayment. While our target business partners were

largely geographically immobile, they were by no means homogeneous. Indeed, the heterogeneity of

approaches, personal histories, and business philosophies among our partners was a source of both

learning and frustration throughout our pilot program.

Loyola-York Road Microfinance Pilot Project

The initiative

As mentioned earlier, the key initiative for this project dates back to a donation received by

Loyola’s Sellinger School of Business and Management for the purpose of local microfinance in a

student-centered context. An initial brainstorming session in Fall 2015 between the dean of the business

school, key administrators from existing service learning and community outreach programs at Loyola,

and the authors of this paper led to the birth of this pilot project. The idea was to implement this program

in two distinct stages. The first was to build a working relationship between student workers and local

businesses to identify potential partners. Once these partners were identified, stage two - the rollout of the

microfinance loan - was to begin. We describe below each of these stages in turn.

Relationship Building

The intent of this stage was to (a) identify potential partners for the project, (b) establish a

trusting business relationship with them, and (c) develop a viable business plan that could incorporate

potential microfinance loans. As we explain below in the section Target Partners, developing a trusting

relationship with businesses in economically depressed neighborhoods is one of the biggest hurdles in a

project of this nature. It requires patience, persistence and significant time commitment from the students

(and, generally, whoever wants to get involved in such an endeavor). It is the most significant investment

in terms of human capital - one that can take anywhere from a few weeks to several months before any

tangible returns can be expected. We had initially allocated the spring semester (4 months) of 2016 for

this phase, but the actual timeframe extended well into the fall semester of 2016. One cause of this

extended effort was the timing of the project; the long summer break between the two semesters led to a

discontinuity in the partnership between the students and the business owners. While we had anticipated

this, it is nonetheless a good lesson for future endeavors. It makes most sense to start such projects in the

Fall semester with much of the initial planning taking place during the summer months leading to it.

Returning to our experience, in terms of the practical implementation, we break down this stage into the

following sequence of steps.

Assembling the Team - Late Fall 2015

Because our objective was to engage a small group of undergraduate students in a real-world

business project while also contributing to their communities, our first step was to assemble a team of

students. We knew at the outset that we would have minimal, if any, physical support from

administration. Further, because neither of us had any relevant experience and there was no prior case

study of this nature for us to rely on, the goals were only broadly defined with no clear targets. Under

these circumstances, and not knowing which skill sets would turn out to be helpful or necessary, we

thought it best to advertise the project to a prescreened group of motivated individuals: honors students.

After screening applicants’ resumes and conducting interviews, we selected eight students - seven from

Loyola’s business school and one from its liberal arts program. We arranged an initial organizational

meeting with the group and set out a broad plan of action. To distinguish this from a standard corporate

internship where students are given precise, elaborate instructions regarding deliverables, we strongly

encouraged students to be independent and take ownership of the project. We wanted to promote an

environment of creativity and entrepreneurship. We hoped to limit faculty involvement to the minimum

extent possible, supervising mainly at the higher level rather than micromanaging every detail. With the

team assembled, we set forth to identify target partners.

Target partners

The foundations for identifying potential business partners were already laid by Loyola’s York

Road Initiative (YRI) - an enterprise predating our project by over a decade that was designed to enhance

Loyola’s relationship with the economically depressed York Road corridor. YRI had resulted in several

mutually beneficial relationships and partnerships with York Road businesses, and given these

businesses’ predisposition to work with Loyola, several were selected as potential candidates for our

student teams. Despite geographic proximity, the businesses were dissimilar in many respects, due largely

to differences in the owners’ philosophies and practices.

After a lengthy and often tumultuous learning process, we categorized our potential business

partners along three dimensions: community-mindedness, trust (in this partnership), and discipline. While

our sample size is small as of now, we believe that all three attributes are necessary for a successful

community partnership. Some business owners are enthusiastic about helping their communities, but lack

the discipline to prioritize long-term growth over short-term needs. Some have this discipline, but do not

trust outsiders bearing an offer of assistance. Still others have both trust and discipline, but see their

surrounding community as a source of profit and not a partner. It is a rare but valuable partner who

possesses all three attributes to lead to a successful relationship, and these partners must be actively and

judiciously sought out. Figure 2 presents a schematic diagram of the first two attributes for the four stores

(with fictitious names). We discuss these attributes below in further detail.

Figure 2: Firms arranged by discipline and community-mindedness

1. Community-mindedness (CM): Many businesses exist solely to turn a profit for their owners,

with no eye toward their communities or the lives of their customers. Others are active

participants in their communities, endeavoring to lift up those around them while simultaneously

remaining profitable. The contrast is especially stark in a depressed economic area. Some owners

keep all items behind bulletproof glass, charge the highest price the market will bear, and/or take

no interest in the lives of their customers. Customers shop at these stores largely either for

convenience, out of habit, or some combination of both. Other stores, including several we

observed, took pains to demonstrate their concern for community members, whether through

reduced prices, overtures of trust, or a willingness and enthusiasm to hold extended conversations

with customers. Some would even turn away business from young customers whom the owners

knew should have been in school. This sort of CM, from our experience, is essential for a

mutually beneficial partnership like the one we proposed, and this meant the exclusion of Costlo.

2. Fiscal Discipline: While one might think the best way to assess the business acumen of an

individual is through the performance of that individual’s enterprise, such is not always the case

in an economically depressed area. Several of the owners with whom we worked had begun their

businesses already saddled with personal debt, and their complaints of inaccessible credit echo

extant research (Bates 1997). Nevertheless, the difference between successful partnerships and

failed ones depends in large part on the ability of the recipient to run a successful business

without a microfinance loan.

3. Trust: Many business owners would naturally greet an offer of free (or zero-interest) capital with

suspicion, and the trust referenced here is difficult to build. Frequent visits and offers of non-

financial assistance were the olive branches used to establish rapport and familiarity with several

business owners, and these offers were met with varying degrees of success. Some owners were

simply unwilling to trust outsiders, and our team eventually stopped putting effort into pursuing

these businesses. This meant the exclusion of A1 from our portfolio, a particularly difficult

decision given the owner’s thriving, profitable business and his excellent rapport with the

community.

Forging Partnerships

For brevity, we do not provide detailed documentation of the extensive work that our students did for the

stores. Instead, we summarize this section with the list of the key contributions by our students to select

stores along with some photos.

● Conducted marketing campaign and surveyed potential store customers

● Developed basic inventory and budgeting systems

● Helped with store organization and cleanup

● Helped with computer literacy

● Held detailed discussions about profitability of product types and potential restructuring

Figure 3: Marketing campaign

Figure 4: Example of basic inventory system

Figure 5: Store reorganization

Figure 6: Customer survey data

These efforts did not involve the exchange of money or the funding of large capital investments,

but they served the key function of demonstrating Loyola’s long-term commitment to its community

members, something the business owners needed to see. Offering help with Microsoft Excel, helping to

move heavy refrigerators, and simply checking in once a week to see how the businesses were doing all

combined to create a sense of good faith and goodwill toward the students, something we hoped to

leverage when it came time for microlending.

Kiva Partnership and Microfinance LoanAs mentioned above, Urbana became the “last store standing.” The microfinance process,

however, turned out to be more complex than initially expected. While we expected to be able to offer a

zero-interest loan directly from Loyola to Urbana, Loyola’s lawyers indicated that this would make us a

bank, jeopardizing our nonprofit status. There were several avenues available to us, the most extreme of

which would have been to set up a separate arm of Loyola, replete with a board of directors, which

seemed far out of proportion to the size of the initiative. Fortunately, worldwide microfinance

organization Kiva had recently chosen Baltimore to be a Kiva City, enabling Baltimore entrepreneurs to

access the Kiva microfinance pipeline.

After a few hiccups, Urbana’s owner had established a Kiva profile and applied for a loan to

purchase new inventory. Kiva allows loan terms of up to three years, interest-free, and allows one

individual to borrow as much as $10,000 at any one time, even if that amount is split among different

loans with different time frames. As of this writing, he is currently in the “friends and family” phase of

borrowing. In lieu of the time- and effort-intensive due diligence normally associated with borrowing,

Kiva substitutes “social due diligence,” reasoning that if an entrepreneur can get 15 close friends and

family members to lend at least $25, then he/she is creditworthy. (The reverse is also true.) Once this

phase is complete, the underfunded balance will be funded by Loyola University.

Lessons learned and future directions

Among the many lessons learned from this experience, three are most overarching and relevant

for our (and, we believe, any) future efforts toward university/community business partnerships: place

great trust in students, greet enthusiastic business owners with skepticism, and seek as many third party

relationships as possible.

Perhaps our greatest success came from placing an abundance of trust in our student teams. By

allowing them to direct their own activities and only involving ourselves as needed, we found that their

effort level and dedication were consistently high. While the teams never became directly competitive

with one another, those who were naturally more prone to go the extra mile served as an inspiration for

those more hesitant to do so. Team members would often approach difficult problems with solutions far

more creative and effective than what their mentors might have otherwise designed. By the end of the

project, we saw our student team members more as colleagues than as subordinates, and the trust we gave

them allowed them to take ownership, flourishing in ways most students would only experience after

several years of employment.

While placing trust in our students proved immensely beneficial, placing the same amount of

blind trust in local business owners tended to be more hindrance than help. Those business owners who

had earned their reputation and profitability honestly were unlikely to trust strangers from the local

university, but those who welcomed us immediately with open arms should have been greeted with more

skepticism. Zebra, the business that welcomed our partnership most readily and enthusiastically, was also

the business with the deepest, most intractable structural problems. Had we chosen to lend them money, it

is doubtful that we would ever have been repaid. The optimism of an entrepreneurial spirit can be

infectious, but it must be tempered with more skepticism than we showed initially.

Despite the seemingly simple task of funding businesses that need funding, a lack of third-party

relationships proved to be a serious limitation on our project’s reach and effectiveness. Out of the tens of

thousands of businesses in Baltimore, we limited our potential portfolio to a small handful, and all but one

potential partnership had to be abandoned for one reason or another. This narrow focus ran the risk of idle

students and has resulted in an overfunded microloan account. Long after program parameters had been

established and relationship building had commenced, we encountered employees of several banks and

other financial institutions with portfolios of loan applicants from which we might have developed new

partnership targets. Casting a wider net might have resulted in a higher count of successful loan fundings,

and is something we will certainly pursue as this project matures.

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