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Is Crowdfunding The Future of Urban Economic Development?

BY Sam Roudman | Wednesday, May 29 2013

Sunset for Oakland's redevelopment cash. Is it a sunrise for microfinance? Photo: damianpenney

Like many cities, Oakland, Calif.’s budget for economic development — and just about everything else — has been slashed in recent years. In the last decade Oakland's budget has been cut by near 40 percent and its staff by 20 percent. Loans for small entrepreneurs from agencies like the Department of Housing and Urban Development have dried up at the federal level, and in 2011 Governor Jerry Brown passed a bill which effectively shut down 400 state redevelopment agencies to make use of the $5 billion in tax revenue they were using. The crunch in state money has left smaller entrepreneurs, who might not meet the requirements for a normal bank loan, in the lurch.

“There are extensive qualifications and there’s never enough funding for all of the worthy business startups,” says Oakland City Councilmember Libby Schaaf.

Lacking local options, Oakland is looking to a solution that first gained traction in Bangladesh and Kenya: microfinance. Last week, the Oakland City Council voted unanimously to begin a partnership with Kiva, a non-profit platform that crowdlends small, low or no interest loans to small scale entrepreneurs in 68 countries around the world. The partnership will be funneled through an experimental platform called Kiva Zip, that allows people to donate as little as $25 directly to entrepreneurs. Lenders can then follow the progress of the loan and the entrepreneur on an entrepreneur’s Kiva Zip page, providing advice and support.

Oakland hopes to channel its expertise in choosing businesses for government loans which no longer exist towards picking startups for the crowd. The city’s Business Assistance Center will help to choose up to three start ups for loans of up to $5,000, with 0 percent interest. The loans will need to be paid back within 10 to 24 months. If the entrepreneurs do pay them back, they can reapply for a loan of up to $10,000.

The partnership won't come close to replacing the loans that have been lost to budget cuts, some of which ranged from $50,000 to $250,000.

People lend to Kiva without getting a return, because they know their loans are helping alleviate poverty somewhere around the world. Kiva Zip provides a way for lenders to contribute directly to the economic vitality of their community rather than make a strictly charitable donation. Kiva Zip is a small but, city leaders hope, promising way to help.

"Oaklanders are going to want to participate in Kiva’s lending platform to support their fellow entrepreneurs right in their home community," says Schaaf.

The program has been running for 18 months in America and Kenya, and has raised over $1 million in loans.

Through Kiva Zip, Oakland will become a “trustee,” an organization that vouches for the business promoted on Kiva Zip, but which, crucially, is not responsible for the loan’s repayment.

“We’re not guaranteeing [the loans] but what we are doing is endorsing these business ideas,” says Schaaf.

Normally, Kiva partners with financing organizations who work directly with entrepreneurs on the ground worldwide. Donations made online are filtered through the partner organization before they reach the entrepreneur. The idea behind Kiva Zip is to loosen the restrictions, and reach a wider base of entrepreneurs.

“It enables us to work with organizations that don’t have the capacity, infrastructure, or desire to administer loans themselves,” says Kiva Zip Director Jonny Price. He says there are more than 200 trustees at this point, and they include churches, neighborhood associations, and student groups. While trustees have expanded the reach of microfinance, their returns have not been as high as with traditional partners. Kiva’s overall repayment rate is 99 percent; for Kiva Zip it’s about 86.

According to Price, these loans will address a fundamentally different constituency than the one benefiting from state redevelopment funds.

"I see this as a new service that has the potential to reach new small business owners and entrepreneurs," he says, one that will "genuinely expand access rather than provide services that already exist."

There is an ongoing debate around crowdfunding city projects. Supporters say it's a form of direct democracy that allows citizens to fund those projects they want or need. Critics say it could be used as a way for a city to cede control over civic projects to those with cash to donate, and that those projects might not be the most realistic of beneficial for a city – that the crowd might not have so much wisdom after all. In Oakland's role as a trustee, Kiva Zip loans are guaranteed a fair amount of vetting, with requirements similar to the government loan programs it's filling in for, but the ultimate choice for which entrepreneurs receive funding, and how fast they receive it, will depend on their appeal to a crowd willing to pay at least $25.

The idea to partner with Kiva came from Kiran Jain, an Oakland senior deputy attorney who used to work for the nonprofit.

“I was thinking about leveraging kind of the work that Kiva does in the crowd lending space with the relationship that the city has with local businesses,” she says.

Jain says the first Oakland certified start up should be selected in the coming weeks, with the others following by the end of summer.

The program will proceed cautiously, but the need apparently is acute. According to the Aspen Institute, there are more than 20 million very small enterprises that could benefit. Only about 2 percent of microfinance needs are met in the U.S. In the rest of the world that number is 17 percent.

"We’re trying to provide financial opportunity for that 98 percent," says Price.

But whether other cities will copy Oakland’s example depends on how the program performs.

“There’s [sic] a few other cities who are really interested in following Oakland’s lead,” says Price.