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We the People

Wednesday, May 1, 1996

With its frigid winters, rocky soil, and lack of mineral wealth, New England was an unlikely center of economic dynamism in the early American republic. But the Unitarians of Massachusetts, Baptists of Rhode Island, and Congregationalists of Connecticut boasted an asset more precious than tobacco or gold: an industrious, courageous, imaginative population that created opportunity in the most surprising places.

        If New England had no resources, its intrepid sailors would find them elsewhere. Salem became the spice entrepot of the world, New Bedford the whaling capital. New Englanders even found ways to make money from the cold, mining and transporting ice to China and the East Indies.

        A visionary in the New England tradition is creating opportunity where most people see only hopeless poverty: the inner city. Jeffrey Ashe started Working Capital in 1990 to provide small loans to borrowers cut off from commercial banking: home-based and storefront businesses in poor urban and rural areas. Since then, this nonprofit, based in Cambridge, Massachusetts, has financed and trained more than 2,200 micro-businesses in New England, Delaware, and Florida. Its loans now total more than $2 million.

        "We practice reverse redlining," says Ashe. "We lend in areas where commercial banks usually won't go, and at amounts too low for commercial lenders to justify the paperwork." Loans from Working Capital start at $500 and rise to $5,000, versus the typical commercial minimum of $25,000 to $50,000.

        Working Capital doesn't check the credit of its borrowers, nor does it ask for collateral. And yet, despite lending in inner cities, the program has an astonishingly low write-off rate of 2 percent, and only 6 percent of its borrowers are behind in their payments.

        Ashe reduces credit risk through an ingenious idea called "peer-group lending." Five to 10 business owners seeking loans come together and agree to provide a kind of social collateral for each other's debts. Working Capital will give new loans to group members only if all the loans from their peers are up to date. Borrowers therefore press each other to make their loan payments on time. This gives all the members an incentive to help each other find customers. And borrowers will join groups only with others of good character. Says Ashe: "People size each other up on the basis of trust."

        "We become family," says Leonor Sanchez, who runs an export-import business in Lawrence, Massachusetts, and has been with a group for three years. To keep their group together, Sanchez and her peers have made payments on three occasions when a member was at risk of defaulting. In another case, a borrower had to sell her equipment to pay off her loan, and the group helped find a purchaser. Fellow members of Sanchez's group include an auto body shop, a bakery, a home-based TV and VCR repair shop, an Avon saleswoman, and several vendors of clothing and jewelry.

        The approach seems to work in a variety of settings. Lawrence, one of New England's poorest cities, has 32 active lending groups, consisting mainly of Hispanic immigrants. Vermont has a successful Working Capital program for rural entrepreneurs. And a new program in Delaware, run by the New Castle County YWCA, concentrates on African-Americans. In its first year, according to program director Mary Dupont, it has given 105 loans with a repayment rate of 100 percent.

        Lending groups were pioneered by the Grameen Bank in Bangladesh, which has given micro-loans to two million peasant women. Ashe became familiar with the idea in the 1970s and 1980s while working with Accion International, a micro-lender in Latin America. Leading U.S. programs include the Women's Self-Employment Project, run by Chicago's South Shore Bank; the Rural Economic Development Center, in North Carolina; and an Accion International program in the Southwest. According to Margaret Clark, a micro-lending specialist at the Aspen Institute, "this is one of the few minority business-development strategies that delivers what it promises."

        Working Capital is still America's largest peer-group lender, and Ashe is looking for partners in new cities. He also aims to reduce the program's costs so that Working Capital can break even in five years. "We'll be able to create even more jobs," he says, "when we become self-sustaining."

        Peer lending has so far attracted more attention on the Left than on the Right. Working Capital takes government funding as well as money from the left-wing MacArthur Foundation, and the idea is a favorite of Hillary Clinton's.

        But Jeffrey Ashe's social capitalism merits a closer look by conservatives. His themes, after all, include escaping poverty through entrepreneurship, honoring one's debts, fostering community self-help, and making a profit. Asked how the private sector could help, Ashe says: "Invest in our programs. We'll pay you back in 10 years, and you will have helped create thousands of new jobs in some of America's poorest communities."

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