In Arkansas, They're Banking on the Poor

HAMBURG, Ark. - Caterer Diane Grayson, 30, was turned down for a business loan this summer. It wasn't bankers who rebuffed her - it was hog farmer Joe Miles Haynes, trucker Ronald Hubbard, and junkyard owner Earl Jacob.

The three men are part of an unusual venture in self-help lending that was created by the owners of a profitable community bank in poverty-stricken Arkansas. Bankers are looking to the program as a model for "micro-lending" in poor rural areas.

"They didn't like my business plan," said Ms. Grayson from the small trailer that houses Ann's Grill and BBQ on the edge of Hamburg. "And they told me, |Before you get any money from us, submit a better one.'" She smiled at the memory.

Her credit-quality-minded lenders in this town of 3,400 also are her partners in an unusual banking venture. It's the Good Faith Fund, a spinoff of Southern Development Bancorp. The privately capitalized, $75-million-asset bank holding company in Arkadelphia is building a small empire of community lending programs.

The Good Faith Fund makes small loans to self-employed people from a pool administered by the borrowers themselves.

Overturning Misconceptions

Southern Development's principal subsidiary, Elk Horn Bank and Trust Co., is a profitable 104-year-old community bank that was purchased in 1988 by a pioneering group of bankers from Illinois in concert with some Arkansas aristocrats.

Its multifarious ventures - including a real estate development firm, a venture capital unit, and a marketing consulting company - are overturning some time-honored misconceptions about lending. The chief of these is that customers from the lower class are fiscally irresponsible. At the same time, it is helping to stimulate a rural economy that is urgently needs help.

"We like what it's doing here," said Edward Thompson, a contractor and hotel owner in Pine Bluff who is not associated with the Good Faith Fund. "We desperately needed a new approach to banking."

Southern Development was formed by emigres from South Shore Bank, a pioneer community lender in Chicago. Their goal was to export their successful formula for serving the urban underclass to rural Arkansas, the nation's second-poorest state. The beneficiaries are residents of the dusty Arkansas delta, an area in the state's southeast. Unemployment in the region, the state's poorest, is running over 10%.

Ultimate Objective

George Surgeon, president of Southern Development and of Elk Horn, said the ultimate objective is to see tangible economic progress in the region within 15 to 20 years. He realizes that to make a difference his company must also make money.

"I'm keenly aware that Elk Horn was a healthy bank when we bought it in 1988, with a long tradition of community banking service," he said. "We consider one of our prime duties is to maintain that tradition."

Elk Horn earned $651,000 in the first 10 months of the year, 24% more than in the same period in 1990. Nonperforming assets at the end of Oct. 31 totaled $356,000, or 1.4% of total loans plus foreclosed real estate.

Alternative Routes

Mr. Surgeon, 41, plies his trade in a uniform that belies his bankerly words - jeans and a blue polo shirt emblazoned with the company's elk-head insignia. His lieutenants search the countryside for creditworthy borrowers. When they come across a firm that seems sincere but fails to meet Elk Horn's credit standards, they refer it to one of the nonprofit subsidiaries.

Mr. Surgeon says he strives to separate the nonprofit ventures, such as the Good Faith Fund, functionally and developmentally from the bank.

His strategies are being watched closely by bankers under pressure from legislators to increase their lending to the poor. Indeed, some local banks are encouraging Southern Development's efforts by paying for the printing of promotional brochures and referring customers to Elk Horn and its Southern Development affiliates.

Since 1987, the parent company has invested over $6 million in small businesses in southern Arkansas, provided more than $1 million of short-term business loans, and sold financial and marketing support to more than 40 start-up firms and small businesses.

"It isn't Yankee finance," said Mr. Haynes, the hog farmer, who hails from Seed Tick, a backwater town of 300 near the Louisiana border. "I'm learning how to stay out of debt."

Mr. Haynes is one of about 50 borrowers in the Good Faith Fund, a program that has quietly taken hold in the delta. Good Faith substitutes peer pressure and self-reliance for a credit record and collateral.

The fund currently has 12 lending groups, with four or five members in each one. They borrow at market rates with terms of about two months.

Individuals can borrow about $1,200 at a time, but they depend on each other for access to the next loan. Only after the first loan is repaid can the next member or two step up to the borrowing window.

It's not high finance, as Mr. Haynes said, but it appears to work.

Interest Lid Hurts

The fund, with only $18,500 of loans outstanding, is a drop in the bucket of economic need. And unlike Elk Horn, it is not yet profitable. That's because of state usury laws that restrict interest rates to 5 points over the discount rate, or 9.5% currently. Also, delinquencies are running at 7% of outstanding loans.

Julia Vindacius, who designed the fund, said it needs to charge 11% if it hopes to break even.

Ms. Vindacius, a former officer of South Shore Bank with a degree in planning from the Massachusetts Institute of Technology, has applied to borrow from a new program of the Small Business Administration that will allow the fund to charge up to 11.5% for its loans.

Inspiration from Bangladesh

She created the fund after visiting Bangladesh in 1987 to study the work of Muhammad Yunis, the founder of the Grameen Bank, the prototype for community lending cells. It is profitable in part because of India's cheap labor costs.

Ms. Vindacius' loan representatives are hardly overpaid; salaries are $20,000 a year. They spend long days on Arkansas' back roads visiting lending groups and conducting seminars for would-be clients attracted by ads in local newspapers.

"We do it because we believe in what we're doing," said Sheila Middleton, a former commercial banker who works out of the Ashley County courthouse in Hamburg.

Southern Development attracts its share of former Peace Corps volunteers but also has lured some traditional managers.

Southern Ventures, for example, is a venture capital unit run by Jeff Doose, a former Mississippi factory manager. He buys small stakes in businesses, providing equity that allows their credit-deficient owners to reapproach their banks for loans.

Mr. Doose works on old-fashioned bankerly instinct: He studies the business and makes "character calls" to decide if the owner is trustworthy. Like venture capitalists everywhere, he closely monitors his investments, wading through rudimentary cash-flow statements and stopping in frequently on the companies to check their operations.

For When the SBA Says No

Todd Carston, a former investment banker with BEI Golembe & Associates, runs a unit that guarantees loans for borrowers who would not otherwise qualify for Small Business Administration advances.

His greatest success thus far has been a loan to American Cedar, a small furniture company north of Pine Bluff.

Since Mr. Carston bankrolled the firm last year, its annual sales have increased by 599% to $1.2 million, according to South Shore loan officer Shannon White.

The Rockefeller Connection

There are other believers in the programs. Ronald Grzywinski, a cofounder of Shorebank Corp., South Shore's parent, elicited the support of the Winthrop Rockefeller Foundation when he decided to buy Elk Horn in the mid-1980s and use it as the engine of recovery for the local economy. The foundation is bankrolled by the former Arkansas governor.

The Federal Reserve Board rejected Mr. Grzywinski's original plan, saying Shorebank and the Rockefeller Foundation would have had too much control.

The foundation ended up buying $2 million of nonvoting stock; 25 other investors contributed $4.5 million.

PHOTO : GRASS-ROOTS BANKING: Good Faith Fund member Diane Grayson, above left and right, at her Ann's Grill and BBQ, with Sheila Middletown a fund adiveser. Below, loan officer Todd Carston at the main branch of Elkhorn Bank and Trust. The temporary office at bottom is being used as a branch while the building behind goes up.

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