Peer Lending: Credit for Those Who Need it Most

by Connie Berman

Editors Note: Peer Lending is finally catching on in the Maritimes. It is an excellent example of micro-entrepreneurs pulling together within their community to find an innovative way around an age old problem - what to do when the bank turns you down for a loan! Not only do they get their loans but they also benefit from each other's business savvy.

When Barb Smith wanted to take out a small bank loan for her pony-ride business in Shelburne County, she was told by the bank to put it on her credit card. James Brown of Lockeport was living on welfare, but trying to start a lawn-care business. With no assets and no credit history it was impossible to access even a small amount of credit. With a small loan, Sara Whitehorn would buy more software for her home-based office services business in Halifax.

These micro-entrepreneurs, and others like them, people with sound business ideas who are held back by lack of access to credit, are the people most likely to benefit by peer lending.

The concept of peer lending is remarkably simple. The peer lending model begins with a borrowing group of four to seven members, each with their own businesses, who analyze each other's loan applications. Because group members approve one another's loans, they must each take the role of bankers, assessing the credit risk of every other member's loan request. Borrowers are not legally responsible for each other's loans. But if anyone in the group is delinquent, no one else can receive any further loans until the delinquent loan is back on schedule.

Loans start at $500 and increase to a maximum of $5,000 through a series of five successfully repaid loans. Anyone with a small full-time or part-time business is eligible to join a group (craftspeople, artisans, desktop publishers, handy persons, clothing makers, street vendors, etc.) as long as they are regarded as trustworthy by their peers when forming a group.

The benefits of peer lending go well beyond providing access to loans and establishing a credit rating. Regular monthly meetings become an opportunity for exchanging business insights and ideas, for addressing difficulties someone may have repaying a lone, for brainstorming on each other's behalf.

Peer lending has been operating in developing countries for many years. Since 1976 in Bangladesh alone the Grameen Bank has lent $1 billion to about 1.8 million Bangladeshis. The bank now lends $1 million a day, mostly to women, with a repayment record that rivals that of any of the more conventional banks.

Success with peer lending in Latin America led one Canadian foundation to bring the model home to Canadian micro-entrepreneurs. Calmeadow, a non-profit foundation based in Toronto, has organized funds in Vancouver and Toronto as well as a First People's Fund in Western Canada and the Northwest Territories. For the past three years, Calmeadow has funded a pilot initiative in Shelburne County, called the Partnership Assistance for Rural Development (PARD) which now has borrowers. While some groups have had problems to deal with, the repayment record at the bank remains, remarkably, at 100%.

Calmeadow Nova Scotia was recently established to oversee the creation of several loan funds over the next five years throughout Nova Scotia. Community groups in King's County, Annapolis, Sydney, Port Hawksbury and Metro Halifax have been working with Calmeadow Nova Scotia staff to set up their own community based loan funds. The loans themselves, once approved through the group process, will be made directly to each borrower by the Royal Bank.

In Metro Halifax, Shambhala Peer Lending was started by members of the Shambhala Centre in Halifax to benefit micro-entrepreneurs throughout Metro, particularly (but not exclusively) women. People who are interested in finding out more about how peer lending works and how they might form a group are encouraged to call the Coordinator, Connie Berman, at 492-3585.