PIONEERS IN MICROFINANCE: Ron Grzywinski and Mary Houghton of ShoreBank

Ron Grzywinski and Mary Houghton founded ShoreBank, the Unites States’ first community bank, in 1973 with Milton Davis and James Fletcher. While their company proved that a bank could make money serving poor customers, Mr. Grzywinski and Ms. Houghton have also shown leadership and commitment to the provision of accessible financial services outside of ShoreBank. They worked with Muhammad Yunus during the foundation of the Grameen Bank in Bangladesh and advised Bill Clinton on the development of community banking in the US. In 2006 Mr. Grzywinski and Ms. Houghton together received the Gleitsman Citizen Activist Award at Harvard University. They were also recognized by US News and World Report among “America’s Top Leaders 2007.”

The purchase of South Shore Bank set in motion the events that shaped their remarkable careers. The bank was in a neighborhood of Chicago that had experienced dramatic racial change, from 100 percent white to 70 percent African-American in the previous decade. Racism and the relative lack of wealth of the new residents led the neighborhood to deteriorate, and the bank had seriously considered leaving the area. ‘Redlining,’ whereby a line marked on a map would indicate areas that banks no longer intended to serve, was common in the 1960s and had been a problem in neighborhoods adjacent to South Shore.

Mr. Grzywinski and Ms. Houghton’s new bank was designed to overcome this practice and re-invigorate the local community, while also making a profit. This had never been achieved before and carried a huge financial risk, as well as engendering plenty of skepticism from both the banking industry and the community itself. At that time, there were no role models in banking touting their success in social investment. At the time, the work they took on was “most unusual,” as Mr. Grzywinski dryly comments.

Their motivation stemmed from a confluence of passionate political belief, vision for making a difference and practical opportunism. Along the way, a great deal of tenacity was required to bring their plans to fruition. Well-aware of the extreme racial tension that existed at the time, the founders were inspired by political events of the 1960s. Ms. Houghton says this left them “deeply determined” to prove that there were constructive ways to overcome the effects of racism.

Their vision for the business was clear, as Mr. Grzywinski explains: “We wanted to create a corporation that was totally developed using private sector resources for the purpose of doing development amongst people who have fewer resources. Right from beginning we knew the organization had to be self-sustaining and organized for profit – it’s possible this was the first deliberately for-profit social business. We also felt we had to have a comprehensive approach to neighborhood and community renewal. It was not just banking, but housing and venture capital too.”

A change in banking regulations added the final ingredient. Congress acted in 1970 to permit new activities for Bank Holding Companies, including investment in community development operations that worked primarily for the benefit of low- and moderate-income people. This change allowed ShoreBank to work toward its mission while simultaneously fitting “into the mainstream of the country’s banking system,” explains Mr. Grzywinski.

The business was not an automatic success. Mr. Grzywinski comments: “We were massively undercapitalized: we bought a failing USD 40 million bank, raised only USD 800,000 equity capital and borrowed USD 2.25 million on a floating rate loan from American National Bank. During the first 10 years, the prime interest rate went up to 21 percent, but we never missed an interest payment. Those were difficult times.” Ms. Houghton continues, “We had a high-volume deposit business that was hard to manage because it wasn’t very profitable – figuring out the right model was one of our very biggest hurdles. At the same time we used an enormous amount of trial and error to find the market niches on the lending side that would help to rebuild the neighborhood.”

These problems came hand-in-hand with skepticism and a lack of belief in the project from all quarters. “Convincing the community to begin investing in its own self-interest was a difficult challenge,” says Mr. Grzywinski. “All the local institutions, whether hospitals, school boards, realtors or bankers, were conveying the message that the community was going down and was going to be abandoned, as had happened in many nearby neighborhoods. It took us over three years before we were able to establish a change in self-confidence.”

The banks were not convinced either. “Everyone deeply believed that we would not succeed: that we were naive and we would fail,” says Mr. Grzywinski. But in many ways this adversity was a motivator, as Ms. Houghton adds: “I personally enjoyed standing up and giving speeches my whole career saying, ‘Go down this path; it might take more courage, but it’s more interesting than conventional banking.'”

As a result, the team focused only on South Shore in the first decade before exploring new opportunities in the late 1980s and 1990s. Shorebank Corporation now has subsidiary banks in Cleveland and Ilwaco; affiliated nonprofits in Chicago, Cleveland, Detroit, Ilwaco and Portland; business development services in Michigan’s Upper Peninsula; an international consulting arm with ShoreBank Advisory Services and a new venture into environmental and conservation lending with ShoreBank Pacific.

Looking back on their careers, the two founders cite their lack of formal knowledge as part of the reason for their success: “The skills that were critically important were a liberal arts education, as well as an ability to see things more broadly and perhaps not knowing what should not be done,” says Mr. Grzywinski. Ms. Houghton agrees, “I think that we were in a position where we took a larger risk than maybe one would take if one had built up all the rules that an MBA graduate does.”

They believe their most important achievements have been aligned with their original vision. “We’ve helped create the idea that the democratization of credit is a legitimate and sustainable objective. We’ve been able to demonstrate to the managers of debt capital that loans made correctly and soundly to low income people, whether on south side of Chicago, in a village in Bangladesh or anywhere in between, can be solid business with profitable results and can accelerate the rate of development,” says Mr. Grzywinski.

Both agree that if they had to start again now, the same drive and passion would be there. Ms. Houghton says, “We’d be smarter, faster, better, but we would try to do the same thing: build an institution that tries to stand in between the for-profit and the social sector.”

Mr. Grzywinski is currently Chair of the Board of ShoreBank Corporation and Ms. Houghton is its President.

This is the first in our “Pioneers In Microfinance” series, recognizing early innovators in social finance, which is generously underwritten by the Deutsche Bank Microcredit Development Fund.

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