When the Filene Research Institute and its partners set out to study the role banks and credit unions could play in improving the financial wellbeing of minority households, Alterna Savings & Credit Union (140,000 members, $5.1 billion in assets) and its microfinance program seemed like a natural fit.
Ottawa-based Alterna launched its microfinance program in June 2000 and has since lent more than $5 million with a 96 percent repayment rate. The well-established program offers loans between $1,000 and $25,000. It’s considered unique for pairing loans with financial education and added support services such as financial planning and business coaching for borrowers.
“I think what intrigued Filene was the wrap-around support to help individuals and entrepreneurs succeed,” says Susan Henry, Alterna’s manager of community investments. Henry has 25 years of experience with microfinance and helped the credit union create its program.“It may require more [resources] but it’s a good investment not just for the credit union but also for the individual in need of the financing.”
Alterna was the only Canadian credit union selected to participate in the Reaching Minority Households Incubator — a process designed by Filene, a think tank for the consumer finance industry, in collaboration with Visa and the Ford Foundation — to analyze five financial products with strong track records designed to help an underserved part of the population.
Alterna was the originating credit union for the Community Microfinance Loans (CMLs) portion of the two-year project that ended in late 2017. Eight other “testers” were added to the group to help determine the results, including Alterna’s Peterborough Community Savings Credit Union subsidiary. The other four financial products tested included Individual Taxpayer Identification Number (ITIN) lending, data-mined auto loans, QCash small-dollar loans and Payday Payoff installment loans. Filene tested the five products — using a handful of financial institutions and loans per product — to determine how well they met the needs of minority households and their long-term sustainability. The testing included whether each product was scalable, had an impact for consumers, was desirable for both credit unions and their members and was financially sustainable.
Lending with support
Alterna’s microfinance program was cited for its lending support programs as well as its “character-based” underwriting, which considers an applicant’s skills and the quality of their business idea, in addition to community partnerships that give borrowers access to experts outside of the credit union. Henry says Alterna aims to go beyond traditional finance to develop loan products that have a social impact on their communities. “It comes down to: is there a gap in the market and can we create the financial tools to fill and further develop financial inclusion?” She adds that the program is often a springboard into more traditional lending for borrowers.
“Our goal is to make microfinance more accessible and actionable for financial institutions.” – Adam Lee, Filene Institute
It’s these qualities of Alterna’s microfinance program that led entrepreneur Marilyn Simms to seek two loans, totalling $7,500, from Alterna for her Toronto-based company, Vert Catering, a green catering company that specialized in fresh and local foods. Simms had several years of experience in the food industry and decided to start Vert Catering in 2005, targeting conference production companies, interior designers, architects, environmentalists and wedding parties. The first $5,000 loan was made in 2010 to help the catering company purchase a vehicle, while the second was for $2,500 in 2012, used to buy a commercial dishwasher. “I like the support from the entire Alterna team,” says Simms. “My loan account coordinator is always inquiring on how the business is doing and I feel they want to see us succeed. They have given a lot of advice. I also know that I can make an appointment at any time and ask any question. It feels like a community. Alterna aligns with our business values.”
Testing the microfinance model
Alterna’s well-established microfinance program served as a model for the other credit unions that participated in the CML part of the Filene incubator, each with little or no experience in the specialized area of lending. Filene tallied the results for all nine credit unions, including Alterna, and found a largely positive response.
According to the final report, all borrowers said they would recommend the program to family and friends and 96 percent said they would use the program again if needed. The report also states that 55 percent of borrowers came from minority households “and their experience with the program was more positive than non-minority households in nearly every category.” What’s more, 62 percent of respondents said the loan was to start a new business, “demonstrating promise for financial institutions to reach new entrepreneurs in their community,” the report stated. Return on assets was 0.90 percent, which Filene states was slightly higher than the industry average of 0.75 percent. “The strongest sign of long-term program scalability was that all testing credit unions will continue to offer the program and all would recommend it to other credit unions,” the report said, adding that, despite the significant time and effort required to set up the program, “it positioned them to fulfill a core community need.”
Rosa Franco, director of lending at Neighborhood Trust Federal Credit Union in New York, says being
part of the Filene CML loan program gave her the tools and resources required to restructure her organization’s small business loan program. For instance, instead of asking borrowers to fill out
the same documentation for every loan size, there is now less paperwork and scrutiny on smaller-sized loans as compared to borrowers asking for larger sums. “We tried to make it less overwhelming and to make more sense for the borrower. Our program is working much better now,” says Franco, whose credit union has one branch and about 4,200 members who are predominantly immigrant and entrepreneurs based in such New York City neighbourhoods as Washington Heights, Inwood and West Harlem.
Changes to the CML program also enabled Franco’s credit union to add resources and to develop community partnerships that, in turn, has led to referrals from organizations specializing in offering technical assistance to small businesses.
The update also increased demand for microloans, which has brought more business to the credit union and enabled it to receive a federal grant to help build up its financial reserves and invest more in its microfinance programs for the future. The incubator “opened my eyes as to what was possible,” says Franco, adding that members are also noticing a change in the process and are feeling more empowered. Franco commends Alterna and Henry in particular for sharing the information and tools that enabled Neighborhood Trust to set up a successful CML program. “I hope more organizations will be willing to do this for their communities,” Franco says.
While Alterna was more of a teacher than a student in the program, Henry says the experience reinvigorated her credit union’s goals to create more financial inclusion, particularly among minority households. “It has given us the energy to move forward to continually do this even more and help to build more financial resiliency and inclusion for all,” Henry says. “It’s about fostering this type of leadership and making sure that it continues so that, as credit unions, we can service more individuals who are excluded from mainstream financial products and services.”
The Filene incubator report concludes that microfinance may never become a large portion of a credit union’s asset base (noting that just 0.01 percent of Alterna’s assets are in CMLs) but offers “strong potential” for financial institutions committed to helping local communities build economic capacity and meet the needs of minority and other vulnerable households. “We are also heartened by the fact that both consumers and credit union managers reported positive consumer experiences with CMLs, positive views about their scalability, positive views about their role in reaching minority and financially vulnerable households and moderate protability once the program was rolled out in full,” stated the report.
“It has given us the energy to move forward to continually do this even more and help to build more financial resiliency and inclusion for all.” – Susan Henry, Alterna Savings & Credit Union
Adam Lee, Filene’s incubator director, says the organization is now working with Visa to reach what he calls “the ultimate goal” of the incubator — to have more financial institutions implement the most promising concepts tested, including offering microloans in their communities. Filene and Visa are working on a program model that banks and credit unions can use to help them set up a microfinance program that is both impactful and sustainable in their communities. “Our goal is to make microfinance more accessible and actionable for financial institutions,” says Lee. ◊