PIONEERS IN MICROFINANCE: Ron Grzywinski and Mary Houghton of ShoreBank

Based on the great response to yesterday’s profile on Mr. Grzywinski and Ms. Houghton, we are offering the following transcript of our interview to give you more of the visionaries’ own words:

MicroCapital: Was there anything particular in your upbringing or background that stimulated you towards this form of career in social investment?

RG: The four of us came together in the late 1960s for the purpose of doing small business loans in inner-city neighborhoods in Chicago after they had experienced dramatic racial change and the beginnings of deterioration. That’s how it all started. The four us included two African-American men, Mary and myself, who got along quite well and who were highly motivated by our work. We had the idea to create what eventually became ShoreBank, a corporation that was totally developed using private sector resources for the purpose of doing development amongst people who have fewer resources. We bought what was then the South Shore Bank in August 1973 and three of the four of us started working here after that time. For the first 10 years or so that’s all we did. We were invited in 1983 through the Ford Foundation to go to Bangladesh and to work with Yunus when he was getting a bank charter. So that’s the background. I think the motivation for me was the opportunity to use the resources that I managed as a banker to achieve social objectives and that has continued ever since, but just with more places and more and more opportunities.

MC: At that time being bankers who wanted to do social investment must have been quite unusual.

RG: It was most unusual. We see that banks are beginning to move there now, but they are moving slowly. Compared to what it was then, today it’s like a landslide. We were the second bank in the country to start a program to finance minority small businesses, and it wasn’t until the mid-1980s when Governor Clinton invited us to come to Arkansas that there was a second effort made to try to use banking resources for development. So it was most unusual

MH: Ron was the only one of the four of us who had banking credentials; the other three did not. Ron had moved from IBM, where he was selling into the banking system, to being a president of a bank at an early age; and he had sales skills.

RG: None of us had formal business training or banking training. We had all come out of different kinds of liberal arts education and had a variety of relevant experiences. So it’s true that I had been President of another bank prior to the Hyde Park Bank and then I was president of the Hyde Park Bank in 1968 and with another guy I had put together a group that had bought the bank. So I did have more experience, but only by a couple of years.

MC: Were you personally motivated by your connections to the area – by a motivation to do right by the place you lived in? Did this affect your thinking?

RG: I am a product of the South Side of Chicago, which is where we are headquartered. Mary is originally from Milwaukee and came to Chicago.

MH: Sometimes people assume that all four of us were very active in the civil rights movement in the US; actually we were about two or three years too old for that. But we were all observers of the extreme racial tension that existed in the US in the late 1960s. So I think we were all quite deeply determined to prove that there were constructive ways to approach the effects of racism.

MC: Do you think your liberal arts backgrounds were particularly helpful? Is the focus today on MBAs, even for those in social investment finance, a good thing, or do people need a more-rounded education?

RG: We take pride in the fact that we encourage people to disagree at ShoreBank. My sense is that the skills that were critically important were, in my opinion, a liberal arts education, an ability to, or some capacity to, see things more broadly and perhaps not knowing what should not be done. We had enough experience – saw the potential – but did not have the formal training that would cause us to think much harder about taking those risks. I think today it varies; there are some highly qualified MBAs, lawyers and others who are operating heads of different ShoreBank units (there are 14 different companies in ShoreBank today). On the other hand, out of the old-timers, there are five or six people who have very key positions who do not have MBAs and come from liberal arts backgrounds. I think it depends on what kind of organization you are running. As organizations become more complicated and larger, one needs more and more of those kinds of formal training and disciplines. On the other hand, some of our most dynamic organizations are run by people who do not have that type of training.

MC: Right

MH: Three more comments. One is that 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. We didn’t have quite as many options in the corporate world that those people do. Point two is that two of these guys were African Americans: one was very broad and wise and the other was a very focused business guy who operated in the African-American community. Those two skill sets came out of their personal life experiences.

We were just at Davos, where there was an interesting discussion about leadership in international business. I was very interested that two or three of the panellists who were highly placed executives (from the Yale School of Management) argued that key characteristics are empathy and ability to listen across cultures. At some level we were all intuitively quite strong at that. For MBAs, those skills are also really valuable, and we hire many MBAs all the time here now. Their ability to listen to customers and be comfortable in very ordinary or international surroundings is important.

RG: To add to that, one of the other people on the panel said they’re looking for leaders with a strong will to win and the capacity to innovate – when I look back 35, 40 years ago that was what we brought.

MC: At the beginning, what was your most important innovation, whether it was a philosophy or practical application? What provided the initial linchpin for success?

RG: 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, as all the previous attempts to raise capital said that the primary focus of the investment is to achieve development outcomes, not maximize the return on capital. There was a very strong orientation that had to be for profit and self-sustaining.

Second, we felt we had to have in addition a comprehensive approach to neighborhood and community renewal. It was not just banking but housing, venture capital, things of that sort.

Third, we took advantage at the time of a recent change in regulations covering all bank holding companies in the US. In fact 95% of banking resources are organized as bank holding companies, for example JP Morgan, Chase, Bank of America, etc. They, like us, are regulated by the Board of Governors of The Federal Reserve System – there are no different regulations for us, other than what might be based on size.

In 1970 Congress passed what was technically known as the 1970 Amendments to the Bank Holding Company Act that directed the Federal Reserve to define permissible activities for Bank Holding Companies. The Fed listed six categories of activities closely related to the business of banking that were permissible for Bank Holding Companies, the sixth one on the list was that all Bank Holding Companies could invest in community development corporations if the primary goal was community development for the benefit of low- and marginal-income people. That happened as we were trying to design ShoreBank.

We asked ourselves a rhetorical question, if the Federal Reserve Board is willing to allow a bank holding corporation to invest in such corporations, might they allow a Bank Holding Company to be a community development corporation? Before we got an answer, we designed ShoreBank around the idea that it would be a regulated Bank Holding Company and would fit into the mainstream of the country’s banking system.

MC: So there was a confluence of things happening that you took advantage of?

RG: When Yunus was experimenting with the Grameen project he’d independently come to the realisation that he needed a self-sustaining organisation that could mobilise deposits, doing what all banks do; that’s why he applied to government for a banking charter.

MC: At this point what was the greatest hurdle that you faced?

MH: The bank that was acquired was very well-run, but its market had flipped from 100% white to 70% African-American in the previous 8 – 10 years. The new customers of the bank were quite a lot lower-income than the departing residents of the neighborhood. So we inherited a bank with a retail deposit business. We opened up access to the bank by changing hours and lowering minimums, which meant we had a high-volume deposit business that was hard to manage because it wasn’t very profitable. Figuring out the right model for a retail deposit business was one of our very biggest hurdles.

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, and they had to be flexible enough that when it turned out the niches were different than we had imagined, we could just move with the market.

MC: I understand that you initially focused on small businesses then moved to housing?

RG: I would add two things to that. During the preceding four years before we bought the bank, it had lost half of its deposits – it had shrunk from an USD 80 million bank to a USD 40 million bank. It had attempted to get permission to close the office in this neighborhood and move to downtown Chicago. It was denied permission in December 1972 in response to smartly organised talent being brought to bear, and the bank was required to stay in neighborhood.

But, as part of that loss of deposits, there was also loss of community self-confidence. All the institutions, whether hospitals, school boards, realtors, bankers, were conveying that the community was going down and was going to be abandoned, as happened in many neighborhoods that were adjacent to South Shore. So, what we had to do was create a new sense of community self-confidence and to get people to believe that if people invested their own money in improving the neigborhood, the neighborhood would get better and their investment would be solid. It took us over three years before we were able to establish a change in self-confidence.

The other thing was that we were massively under-capitalized: we bought a failing USD 40 million bank, we raised only USD 800,000 equity capital and we 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, yet we never missed an interest payment. Those were difficult times. Survival as a business was very difficult, and convincing the community to begin investing in its own self-interest was also a difficult challenge.

MC: Did you have public opposition, or opposition in the banking world, or people saying it wasn’t possible? I know about your stand with the Community Reinvestment Act. Does that motivate you, standing up to such criticism?

RG: I think that the banking industry was not hostile towards us. Everyone deeply believed that we would fail – there are stories I could tell you about that. Most thought we wouldn’t succeed, we were naive and we would fail, although the American National Bank did lend us the USD 2.25 million. I think the community was a little suspect, but Milton Davis who came here on the first day was a very wise man and had exceptional skills at dealing with communities at all levels – he lived Rudyard Kipling’s line about talking to kings and not losing the common touch. So, any skepticism on the part of the community we could overcome through him. The other thing was that I had managed two banks, but as a group we had also run a very successful minority small business loan program at the Hyde Park Bank, which was considered the most successful in the country at that time.

MH: I do think that 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.”

MC: Moving on to the modern ShoreBank, did the other elements of ShoreBank – it’s divisions and affiliates – grow organically from original model or were you working hard to keep on innovating?

MH: We had three chances in the 1980s to break out of a single market on the South Side of Chicago: first with Grameen Bank, then setting up in Arkansas and then deciding to open a branch on the far west side of Chicago. In the 1980s we were beginning to be open to chances to innovate. In the 1990s we were asked sequentially to take on projects in other places in the US: in Cleveland, Detroit, Michigan and the West Coast. These were opportunistic responses. Then we learned the limits of that kind of reactive geographic expansion and since then we’ve been trying to build an institution that can methodically expand and routinely innovate over the next 10-15 years. It was probably quite significant that we did nothing but focus on South Shore for 13 years and then began to pursue new opportunities. Now we’ve got an organization deeply interested in innovation and future growth, but with us more in the driver’s seat than being reactive.

MC: Do you think these newer areas – e.g., environmental or international – will take a larger proportion of the business in the future, or will the core continue to be work in local communities?

MH: We’re now in a period where both the international business and environmental banking business on the West Coast are growing solidly and well. They’ll become significant businesses, but the Midwest bank is also growing solidly and well, so it will be hard for the new areas such as the environmental and international areas to grow faster. But we will definitely have all three different categories of business in the future.

MC: What do you think is your most important achievement – what are the things that you might like written on your gravestone?

RG: That we’ve helped create the idea that the democratization of credit is a legitimate and sustainable objective and that 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. I think we’ve contributed to the democratization of credit globally.

MH: ShoreBank has been and continues to be a magnet for talent and has every prospect of growing faster in the future than the past by being able to deploy talent in a decentralized way.

MC: How would you change things if you were starting today? What do you think is the next challenge? What’s not being done right now?

MH: For first question – we’d be smarter, faster, better, but would try to do the same thing: build an institution that tries to stand in between the for-profit and the social sector.

There’s still so much misunderstanding of the grey area between profit maximization and philanthropy. We should get better at identifying all the segments of work that are valid choices for resources – not valuing them as good or bad, or right or wrong – but innovating in the use of resources for the benefit of community and environmental investment.

RG: Adding a specific: there is this sense that there are philanthropic dollars and profit-maximizing dollars. There’s not a clear, universally accepted norm or standard about what the return on capital ought to be if it’s achieving high social outputs. It’s our judgment in ShoreBank that there’s a consistent, predictable low-double-digit return on equity, with liquidity, within strong mission performance. We need to get clearer on what the financial return expectations ought to be for privately capitalized business with social performance standards.

The other thing – I was talking about it this week in Davos – I think there’s a massive opportunity to use modern internet techniques to organize people and their money together, so that people who accumulate savings, whether they are in primarily wealthy nations or not, can feel confident that they’re not sacrificing very much in terms of financial returns for themselves and yet know their savings are being used to achieve social objectives – and in the process can have influence on what those social objectives are. If we could do that it, it could be a massive movement.

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.

PIONEERS IN MICROFINANCE: Ron Grzywinski and Mary Houghton of ShoreBank – Part II

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