Codex

I hear that Minneapolis Mayor RT Rybak is all about the alternative approaches to economic development, so I thought I would offer one up myself: government supported, neighborhood based peer-to-peer lending.

Peer-to-peer lending is a form of microlending, which is not new; see Kiva or the granddaddy of them all, Grameen Bank.  The peer-to-peer concept is a little newer.  Essentially, ordinary people with a little money to invest put small amounts toward loans that other ordinary people need to pay off debt/start a small business/whatever.  The loans are funded by a variety of bidders, none of whom generally contribute more than a few hundred dollars, so investors can spread around their risk by partially funding a variety of loans.  Check out this discription on Prosper for a more complete explanation.

My little thought bubble is that peer-to-peer lending is a great way to address a couple of major issues with troubled neighborhoods – making private capital available for local entrepreneurs, and giving local residents without the credit rating or income to afford a house a way to have a real economic stake in their community.  I think this could be done by creating a government program that combines the Kiva & Prosper approaches, with a little additional twist.

A metropolitan area could start by defining troubled areas that require economic assistance – something most cities are already doing.  The program would work similarly to Kiva for potential loan recipients.  Staff would work with Community Development Corporations, neighborhood groups, and other organizations to identify good candidates for loans, screening out those with bad proposals and working with local business owners, home owners, and others to craft good requests, which would then go into the system for auction.  For lenders the system would work like Prosper – you may bid any amount (down to a minimum) at any interest rate (up to a maximum) on any loan.  Good loans would have their interest rates driven down by bids over the total loan amount.  Lenders wouldn’t have to deal with any of the legal obligations that go along with credit and debit; the government program would be the agency actually making the loan.

The twist to this program would be that in addition to acting as a middleman, the government agency would kick in an additional percent return on every loan within the identified troubled areas.  Let’s say there were a new business starting in North Minneapolis, and the owner needed  $10,000 for equipment.  Say further that the loan was funded at 10%.  The agency would then step in and fund an additional 2%.  This could be done in a couple of ways.  Either the agency could ask the debtor to pay 8% and fill in the rest of the payment itself, or it could pay an additional 2% to the creditor on top of the 10% they would already receive.  The best approach would be a combination – loan seekers would be more eager to participate because their terms would be more affordable, and lenders would be more eager because they would see a higher return (and, presumably, a lower default rate).

Some quick numbers – what kind of money would something like this be likely to generate?  Using Prosper’s figures, they have approximately  $215 invested per member.  Assuming that this program would be promoted to all 2.85 million Twin Cities metropolitan area residents and an approximately 0.2% participation rate (1 in 500; approximately the ratio of Prosper members to the US population) that would mean 5,700 people participating, with a total capital amount available of about $1.23 million.

For a city with a total annual budget of about $1.4 billion dollars this is definitely in the category of sofa-cushion change.  However, it provides a few functions that the existing Minneapolis loan programs do not.  First, it gives normal everyday people a way to invest directly in their city or neighborhood.  This opens an option in between renting (and having no permanent economic stake in the neighborhood) and owning a home or condo (and making an enormous investment that many simply cannot afford).  Second, it involves and strengthens neighborhood organizations, a key element in revitalizing depressed areas.  Finally, it allows the private market to determine what is and is not likely to succeed in a particular area.  While most individuals are not experienced in judging risk, crowd wisdom and a huge base of local knowledge should make up for the expertise of bankers, setting rates fairly accurately.

I don’t think this kind of plan can replace existing programs, but I think it fills a need that nothing else quite serves at the moment.  The more people invested in the well-being of a community, the better.

This entry was posted on Saturday, February 21st, 2009 at 12:53 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.