What is the Capital for Communities Fund?
Why does WCCN have a credit project in Latin America?
How does the Capital for Communities Fund work?
For how long has WCCN been directing funds to
Latin America?
What makes the Capital for Communities Fund different from other
approaches to socially responsible investing and microcredit?
How big is the Capital for Communities Fund?
Who are the Capital For Communites Fund's investors?
What is the process to invest?
How much interest do investors earn?
What are the risks?
How does WCCN mitigate these risks?
Can I decide exactly who will receive a loan
from my investment?
What interest rates do WCCN and its partner
agencies charge?
Is microcredit the solution for poverty?
What is the Capital for Communities Fund?
The Capital for Communities Fund is a project
that promotes socially responsible investment in the US and grassroots
economic development in Latin America. The Fund was created and is administrated
by Working Capital for Community Needs (WCCN), a non-profit
organization based in Madison, Wisconsin. The Capital for Communities Fund channels
money from socially responsible investors in North America to Nicaraguan
microcredit and alternative finance organizations (our "partner
agencies"). Those partner agencies in turn make loans to disadvantaged
Latin American farmers and entrepreneurs - especially women - who otherwise
would have no access to institutional credit.
Why does WCCN have a credit project in Latin America?
Despite significant economic and social progress during the last twenty years, Latin America’s society
remains deeply divided by class, social status and race. The Latin American region is one of the most
unequal regions in the world. A great majority of its indigenous and afro-descendent population lives in poverty or extreme poverty. Latin America continues to face economic problems of extreme proportion with unemployment or underemployment affecting more than half of the region’s economically active population.
According to the Inter-American Development Bank, around 80% of the population in Latin America do not have access to financial services. As a result, it is fair to say that historically private banks in Latin America have not been interested in providing financial services to low-income borrowers. State-owned banks have also come and gone without making a lasting impact. For this reason, private nonprofit efforts such as the Capital for Communities Fund are critical in order to provide economic opportunities to low-income Latin Americans.
Without access to credit, most Latin American farms and small businesses cannot survive, much less
expand production. Small farmers and cooperatives throughout Latin America have been producing at the subsistence level due to lack of access to credit for seeds and other inputs at the beginning of each growing season. In many cases, farmers have been forced to sell their land and migrate to urban areas in search of employment. Loans to farmers, cooperatives and small businesses have a multiplying effect. Loan recipients buy local goods and services and employ local people.
Even a small investment in the Capital for Communities Fund has the potential to make a tremendous
impact in the lives of the poor in Latin America. A loan can help generate employment and allow low
income Latin Americas to feed their families and contribute to the development of their communities.
Realizing the gravity of this situation, WCCN has committed itself
to offering disadvantaged Latin Americans with access to credit with
reasonable amounts of interest, so these persons can expand and
improve their economic activities and thus realize a better standard
of living.
How does the Capital for Communities Fund work?
WCCN does not lend directly to the farmers and entrepreneurs. Instead,
WCCN serves as the intermediary between North American investors
and Nicaraguan microcredit and alternative finance organizations
(our "partner agencies").
WCCN staff and volunteers enact this intermediary role. A Loan
Fund Manager (in Madison) oversees the Capital for Communities Fund's portfolio, maintains
direct contact with the investors, and ensures timely repayment
of the investors' capital and interest. A Loan Fund Representative
(in Nicaragua) maintains day to day contact with our partner agencies.
The Capital for Communities Fund's Oversight Committee - a group of experts in finance,
law, and economic development - meets monthly to monitor the Capital for Communities
Fund's financial situation and to guide lending decisions.
Additionally, every year WCCN promotes a study tour to Nicaragua
to connect some of our socially responsible investors with our Nicaraguan
partner agencies, farmers and entrepreneurs who benefit from
these loans.
For how long has WCCN been directing funds
to Latin America?
WCCN has been channeling microcredit to Latin America since 1992.
We began with the Nicaraguan Community Development Loan Fund (NCDLF),
a collaborative effort with the Nicaraguan Community Development
Fund (Prestanic) in Nicaragua. From 1992-1998, the NCDLF recruited
about $6 million in loans from socially responsible investors in
North America and channeled them to Prestanic for microcredit. Then
in 1998 WCCN decided to diversify and expand, lending not only to
Prestanic but also to other worthy microcredit and alternative finance
agencies (our "partner agencies") in Nicaragua. So in
1998 WCCN started the NICA Fund, now know as the Capital for Communities Fund.
What makes the Capital for Communities Fund different from
other approaches to socially responsible investing and microcredit?
Unlike many other approaches to socially responsible investing,
the Capital for Communities Fund gives you an opportunity to invest in grassroots community
development internationally.
Unlike other microcredit programs, your contribution to WCCN is
an investment, not a donation (Although WCCN does accept donations
to contribute to our equity fund). Furthermore, your money with
the Capital for Communities fund is lent out through several partner agencies rather
than through just one organization. By diversifying our portfolio
as such, we reduce some inherent risks of investing abroad and manage
to reach a broader range of needy borrowers throughout Latin America.
Furthermore, our partner agencies are based in Latin America, not in
the US. These agencies are keenly familiar with the local economy
and culture.
Finally, the Capital for Communities Fund is unique because it not only lends to individuals
(as do most microcredit programs) but also to organized groups of
marginalized persons who are actively seeking to improve their own
lives. This includes lending to cooperatives and small joint ventures.
How big is the Capital for Communities Fund?
The Capital for Communities Fund currently has more than $9 million from
its socially responsible investors putting the total Loan Fund size at $11 million.
Who are the Capital for Communities Fund's investors?
The Capital for Communities Fund's investors are people and organizations who share
these values. Unlike many economic development projects, this Fund
does not rely on a handful of very large contributors for its financial
support. Rather, the Capital for Communities Fund is supported by over 1,500 small
investors. About 95% of these investors are individuals from over
40 states in the US and Canada. Churches, local activist organizations
and small foundations make up the remaining 5% of investors. The
median investment is $5,000.
What is the process to invest?
If you are interested in investing, the first step is read our
Prospectus, which WCCN can send to you
by e-mail or traditional mail. In the back of the Prospectus, there is response form that
you can fill out and mail to WCCN. That form allows you to state
the amount, the term and the interest rate that you wish to invest.
Upon receiving that response form, WCCN will send you a Loan Agreement
for you to sign. That Loan Agreement notes the terms and conditions
that you stipulated in the response form. You sign and return one
copy of the Loan Agreement along with a check (made out to WCCN)
for your investment. The day that we receive the check, your investment
begins accruing interest. Also, WCCN will send you a Promissory
Note that confirms the maturity date for your investment.
WCCN will pay interest annually by mailing a check to you. Your
principal will be paid in the same manner when the investment matures.
Meanwhile, if you wish to receive financial reports to update you
on the Capital for Communities Fund's performance, just let us know and WCCN can send
you quarterly reports.
How much interest do investors earn?
The investor can choose how much interest s/he wants to receive
from the investment, from a range of 0% to 6% annual simple interest,
according to the length of time and amount of money invested.
|
LOAN AMOUNT
|
2 – 3 YEARS
|
4 – 5 YEARS
|
|
$1,000 - $7,999
|
3%
|
3.5%
|
|
$8,000 - $14,999
|
3.5%
|
4%
|
|
$15,000 - $29,999
|
4.5%
|
5%
|
|
$30,000 +
|
5.5%
|
6%
|
Interest is paid annually through a check sent by WCCN. Principal
is repaid at maturity in the same way.
What are the risks?
In ten years of this work, WCCN has maintained 100% repayment to
its investors, always on time. Still, there are risks. Political
instability, natural disasters and economic downturns could inhibit
people's ability to repay. At the same time, the marginalized populations
who benefit from Capital for Community Fund loans typically have no collateral to offer
in case of default.
Therefore, WCCN has instituted several safeguards in its lending
procedures to help ensure repayment in spite of such risks. (See
below.)
How does WCCN mitigate these risks?
WCCN mitigates risks by:
- Maintaining sufficient equity. The Capital for Communities Fund’s equity
is money that WCCN owes to no one; this money could be used in
case of emergency to repay investors. Therefore, WCCN strives
to maintain the Fund’s equity at a level equivalent to 15%
of its outstanding portfolio. For example, if the Capital for Communities Fund has
$1 million in equity, then WCCN allows itself to lend out $6.6 million
– no more.
- Maintaining a loan loss reserve. In addition to equity,
WCCN keeps a loan loss reserve (which is counted as a liability).
Whenever WCCN makes a loan, the US dollar equivalent of 3% of
that loan is set aside in a commercial bank. WCCN cannot touch
that reserve money unless there is an emergency or the loan is
repaid.
- Maintaining sufficient liquidity. Default is not the
only risk a lender faces. If many investments happen to mature
around the same date, WCCN might not have enough cash on hand
to repay everyone at the same time. Therefore, WCCN keeps 10%
of the fund in commercial bank accounts.
- Lending in US dollars. WCCN lends to its partner agencies
in US dollars and the partner agencies repay in US dollars. Since
the US dollar relatively stable, this practice circumvents problems
related to rapid inflation.
- Carefully selecting partner agencies. Before lending
to a partner agency, WCCN scrutinizes that organization thoroughly
to ensure that it is financially sound and trustworthy. The Capital for Community
Fund’s in-country representative visits the agency in the
field and talks to the staff and the borrowers. Meanwhile, the
Capital for Communities Fund’s Oversight Committee (a group of experts in finance
and grassroots development) reviews financial statements to assess
the agencies’ financial and managerial integrity.
- Diligently monitoring partner agencies. The scrutiny
does not stop once a partner agency has been selected. The Oversight
Committee continues to review financial statements each quarter
and WCCN's ’s in-country representative makes periodic field
visits to ensure that the partner agency continues to live up
to the Capital for Communities Fund’s high standards.
- Maintaining a diversified portfolio. We do not put all
of our eggs into one basket. Instead, the Capital for Communties Fund lends to 19
partner agencies, working in different Latin American countries.
Imagine a scenario where one agency is working along the Atlantic
Coastal Region and a tropical storm devastates that area. The
hardship caused by the storm might cause that agency to default,
but the other 18 agencies would not be so affected by the storm
and still could repay on schedule.
We believe these safeguards help to make the Capital for Communities Fund a safe and
reliable investment opportunity. Still, no investment is completely
free of risk. Therefore, we strongly encourage everyone to read
the Capital for Communities Fund Prospectus carefully prior to investing.
Can I decide exactly who will receive
a loan from my investment?
No. WCCN prefers to honor the autonomy of our partner agencies, its people
and its institutions. So as part of our serious, professional and
respectful relationship with our partner agencies in Nicaragua,
we do not intervene in the decision process to grant loans to specific
individuals or groups. We only encourage our partner agencies, through
incentives, to prioritize services to the most needy, especially
women and small farmers.
What interest rates does WCCN and its
partner agencies charge?
WCCN charges its partner agencies 10% interest (on a declining
balance). In turn, MFI's charge their borrowers interest rates that average 36%.
Microfinance institutions (MFI’s) are non-governmental, non-profit institutions, with the primary purpose of promoting economic development through serving those marginalized by the formal banking sector. The interest rates MFI’s charge their borrowers will vary according to loan purpose, averaging 36% annually. These rates reflect the higher cost of providing many very small loans, as opposed to providing very few large loans. And, like the formal banking industry, interest charges must provide for possible loan default. Also the earnings from interest on loans will allow MFI’s to provide free education and assistance, such as computer literacy and business management training.
Since the liberalization of the financial markets in the early nineties, interest rates have gradually decreased. There is downward pressure on interest rates as the total pool of capital increases, spurring competition among Nicaraguan microfinance institutions.
Further explanation from the United Nations, who declared 2005 the International Year of Microcredit:
If microfinance is about serving the poor, why does the provision of financial services need to be profitable?
Microfinance institutions need to be profitable in order to cover the costs of reaching out and meeting the demand of underserved segments of the population over a sustained period of time. Additionally, after a series of very small loans, a microentrepreneur often wants to expand her business; a microfinance institution must keep up with the demand for larger loan amounts so businesses can grow into small enterprises.
How can poor people afford such high interest rates?
Microcredit interest rates are set to provide viable, long-term financial services on a large scale, while subsidized interest rates generally benefit only a small number of borrowers for a short period. Studies conducted in India, Kenya and the Philippines found that the average annual return on investments by microbusinesses ranged from 117 to 847 per cent. These high returns are commonplace among microentrepreneurs, and while the interest rates seem high, they usually represent only a small portion of microentrepreneurs' total returns. Interest rates charged by informal moneylenders are overwhelmingly higher than those of MFIs.
Is microcredit the solution for poverty?
It is part of the solution, but it needs to be accompanied by
other social actions and initiatives. For that reason WCCN supports
social movements that work for a fundamental transformation
of unfair social structures. For examples of such work, visit the
Women's Empowerment Project portion of this web site.
