A Pair of Needs:

With every bank in the U.S. competing for the same pool of consumer savings, it is very difficult for any institution to distinguish itself through the financial instruments or service it offers. Branding becomes a significant expense, and any growth is difficult.

At the same time, there are a few lending institutions whose unique focus - providing very small (fifty to several hundred dollar) loans to poor families in the Third World - has won them the public praise of former presidents Carter and Clinton, and just earned their originator a Nobel Prize. The loans typically allow a family to greatly increase its income within 1-3 years, allowing the parents to do such things as end their children's malnutrition and send them to elementary school. At present, however, the demand for loans outstrips the supply by orders of magnitude. A Pair of Opportunities:

Many Americans take pride in donating to relief efforts... but that pride and a tax deduction are all they get in return. A model in which they can achieve the same results by investing, rather than giving away, their savings should be a much more attractive one.

A bank that offered its customers an option of investing in microenterprise loans could gain market share... New customers would come because they wished to open such an account - but many would presumably also use the bank for their other financial transactions. Furthermore, the free PR value to the bank could be huge: It has been shown that the amount of money needed to raise millions of people (mostly children) out of poverty so severe that it often results in malnutrition is not that great - Thus, even a program that only succeeds in appealing to 1% of American families could have enough impact to make big news. It would also draw the likely praise of at least two former Presidents, resulting in further free news coverage featuring the bank.

Four Potential Issues:

1) Since loans made by current microenterprise institutions must typically be repaid in 1 to 3 years, the money will naturally have to be tied up for that length of time. However, since the deposits of the bank's customers would be pooled, an individual should be able to withdraw the money from their bank account at any time... It would simply be necessary for a fraction of the banks' funds to always be held in reserve. (The program should grow in popularity with time - but as a further safety precaution it should also be possible to find a philanthropist or organization such as the Gates Foundation to guarantee temporary replacement funds in the extremely unlikely event that a run on the bank occurs.)

2) The safety of the investments would naturally be subject to question, since the loan recipients would have no collateral. However, the first and most famous microenterprise loan institution, the Grameen Bank, has been operating for several decades, and has consistently achieved repayment rates near 100%. Billions of dollars have been lent out to date, and the model has proved so successful that its founder received the 2006 Nobel Prize for Economics. Partnering with such an institution should ensure that the funds of the banks' depositors are managed as well as those in a major mutual fund - at no cost to the bank! (Again, some additional insurance arrangements or guarantees against losses could presumably also be arranged... As in the previous case, various individuals such as Warren Buffett, Bill and Melinda Gates, Ted Turner and Pierre Omidyar may be willing to commit to emergency funding in the unlikely event of a massive economic calamity.)

3) Another issue relates to the popularity of the proposed funds. The best evidence that such accounts will prove attractive enough to measurably increase the bank's market share lies in the example of Mr. Omidyar (the founder of eBay), who recently donated $100,000,000 to Tufts University with the stipulation that the funds be invested in microenterprise loans rather than traditional investments.

4) The final issue relates to the interest rates of the loans. Should they be at the low rates of traditional microenterprise loans, which are designed to cover the administrative costs of the nonprofit organization and the occasional unavoidable defaults? (Individuals switching from their present bank accounts would lose money, but still gain a way to stretch their charitable donations much further than if they gave it away to most other charitable causes.)

Alternately, should the loans be at market interest rates, which would actually give them an advantage over other types of accounts that don't have the side effect of saving lives? (Over the course of 1-3 years, the interest would still add only a fraction to the amount of the loan - and it would be a small fraction of the interest that many of the recipients might otherwise have been forced to pay their local lenders. That was presumably the rationale behind Mr. Omidyar's donation to Tufts.)

In reality, the bank could easily offer both options... Customers who are not comfortable with profiting from the poorest of the poor would select at-cost or even zero interest, and receive the documentation needed to claim a tax deduction for the interest forfeited. Other customers would be able to select market interest rates, which would maximize the number of people to whom the funds would appeal and thus the amount of good that they could achieve.

What do you think of this idea or comment?
(You can change your vote at any time)

I agree

No opinion

I disagree