ShoreBank: A Banker to the Poor Goes Bust

ShoreBank is a Chicago-based financial institution that was founded on the principle that everyone deserves access to financial services and that, by offering these services to the urban poor, the community will benefit.  Sound familiar?  Its mission is very much aligned with that of microfinance.  And, since 1973, Shorebank was largely successful in achieving that mission.  Initially serving the South Side of Chicago, the bank eventually spread to Detroit, Cleveland, and much of the Pacific Northwest.   The organization’s ties to microfinance go beyond conceptual: the founders served as the first consultants to Muhammad Yunus when he was scaling up his Grameen Bank in Bangladesh.  David Oser, formerly the chief economist for Shorebank, explains the history of the world-renowned organization:

ShoreBank Corporation, the parent holding company then called the Illinois Neighborhood Development Corporation, was the first to seize on the idea that fostering community economic development needed more than just a bank. A bank, after all, is a reactive institution; it can only lend money to others who then initiate action, whether buying a home, improving a business, or rehabbing an apartment building. So, in the 1970s, the holding company created a non-profit to focus on job training and placement; a loan fund to assist minority entrepreneurs reach scale; and a real estate development company to catalyze neighborhood revitalization in South Shore.

He goes on to explain some of the company’s good works in the developing world:

The achievements of the international consulting firm, ShoreBank International Ltd., are truly breathtaking. SBI’s practice spans the entire developing world.  Its clients and partners are the major international development agencies including the European Bank for Reconstruction and Development, the Gates Foundation, and the International Finance Corporation. In 2009, ShoreBank International facilitated more than 10,000 development loans with an average loan size of $5,000. It trained 485 loan officers, more than a quarter of them women. It raised $62.6 million of debt capital for BRAC, one of the largest microfinance organizations in the world, to fund its initiatives to combat poverty in Tanzania, Uganda and Southern Sudan.

For 35 years, the organization served as a largely successful prototype, proving that a bank could serve the under-served urban poor and still be profitable.  It pioneered a concept called “community-development finance,” a model similar to microfinance.  By extending loans to entrepreneurs and businesspeople in impoverished communities, it is possible to improve the quality of living and socioeconomic status of everyone in the community.  Unfortunately, despite weathering  several economic storms over the past three decades, it succumbed to the tidal wave that was the economic crisis of 2008 and 2009.  The company because over-exposed to the fragile housing market by extending too many risky home loans, which led to a wave of defaults that brought down the $2.1 billion institution.  Even more crippling was perhaps the bank’s exposure to the hardest-hit segments of the population.  The Economist explains:

Although ShoreBank’s management can be criticised for straying too far into riskier parts of the property business—for instance, by lending too much to developers—its demise was primarily because it stuck too closely to its original mission. Given the severity of the downturn in the areas in which it lent most of its money, it would have needed far greater reserves of capital to survive without outside help. As a ShoreBank executive puts it, “the rest of the country experienced the equivalent of a one-in-100-year flood; in the neighbourhoods we are in, it was a one-in-500-year flood.”

Naturally, it was a polarizing organization, vilified by the free-market purists at the National Review and lavished with support by previous and current Democratic presidents.  Right now it is at the center of some controversy, as a recent book revealed that Lloyd Blankfein, CEO of Goldman Sachs, put $20 million into ShoreBank after it went under and encouraged other banks to do the same in an effort to curry favor with an administration that had close ties to the community development bank.  There are efforts underway to revive the bank, which did not qualify for TARP funding due to its ownership structure.  But David Oser explains that perhaps the problem is systemic, and the demise of this experiment in community banking is the result increasingly rough seas, rather than just a rogue wave:

In a larger sense, though, the reason for ShoreBank’s demise is very simple. The economic crisis was not a recession in ShoreBank’s neighborhoods. It was and remains a full blown depression, with unemployment rates of 30-40% and no end in sight. In fact, with the expected cutbacks in local and state government jobs, it’s likely to get worse. The manufacturing jobs that brought African-Americans from the rural South to Northern cities are gone. Affluent and middle-class African-Americans can find more house for the money on the South Side, but they don’t shop where they live and they send their kids to magnet schools or private schools. The original African-American residents of neighborhoods like South Shore are aging. Many of the newer residents are those dispersed from the demolished high-rise housing projects. And, with the exception of a tiny number of so-called “urban pioneers,” non-African-Americans still do not move into black neighborhoods in Chicago.

The organization serves some of the most depressed cities in America – the ones hurt, perhaps ironically, by the transfer of manufacturing jobs to the developing world.  The graph above shows the decline in the number of employed men in its target markets over the past 50 years.  It is taken from a 2009 blog post from ShoreBank’s website, and perhaps foreshadows the trouble it would face 18 months later.  It tried to take advantage of a new green manufacturing economy that some hoped the Obama administration would push in the first years of his presidency.  Unfortunately, the FDIC came a-knocking before it ever had the chance to capitalize.  But it is hard to call Shorebank a failure.  For 20 years Shorebank consistently defied the conventional wisdom about the prospects and practicality from a business standpoint of serving impoverished urban communities.  In some ways, it was king in a cohort of risk-takers, getting in over its head on many occasions.  Oser sums up this notion in his closing paragraph:

But while ShoreBank failed in the end, it succeeded for nearly 40 years. It has changed the world. It was a spark, an innovator, and a model for the enormous pool of talent and energy working on economic development issues around the world today. Its legacy lives on in organizations it founded and that continue to operate such as ShoreBank International. Its legacy lives on through its many alumni whose passion for economic development was kindled at ShoreBank. Its legacy lives on in the lives of millions who have benefited from its services. ShoreBank may be gone, but its ideals remain. That’s what sustainability is all about.

It’s legacy is perhaps proving that it can be done.  That not only is serving these communities possible, it is profitable if done right.  Shorebank made one too many miscalculations unfortunately, but its successors will learn from these mistakes and plan accordingly.  And the next generation of community-development banks will have a much better vantage point from the shoulders of a giant.

Correction:  Well, I was wrong.  It turns out Shorebank didn’t quite go bankrupt.  Here is what actually happened:

A source familiar with the deal revealed that ShoreBank has been effectively resurrected by a holding company largely comprised by Goldman Sachs, Morgan Stanley and Bank of America, all of whom by sheer coincidence have received some $400 million of federal funds to keep the bank alive and strutting.

Deducing from the FDIC statement on ShoreBank’s current standings on its assets and deposits, industry pundits said that the bank holds about 70 percent less of its face value and the group of investors currently managing it were actually collecting multimillion of federal funds in ensuring that the bank’s existing deposits were being serviced.

All’s well that ends well.  God bless political patronage.

4 thoughts on “ShoreBank: A Banker to the Poor Goes Bust

  1. Pingback: ShoreBank: A Banker to the Poor Goes Bust | Develop Economies | Adult Society

  2. Monica Thompson

    ShoreBank indeed was a beacon of promise to its neighborhood, extending on out into the world, for many of its years. Supporters of community development from across the U.S. sometimes deposited money there simply to support its mission and vision. The fact that it later “went too far” into the business of risky loans simply shows that the U.S. in general was naive about how events might spiral out of control if overly risky lending became general and extended to very high value properties.

    I suppose I’m glad it’s being rescued by the government, but even our community development friends have to learn how to stay solvent. I hope the resurrected bank is a little more disciplined in anticipating the risks when it lends money. Kudos to South Shore, now ShoreBank, for calling out redlining and then refusing to participate in branding certain neighborhoods as poor lending risks. What we’ve learned in the last few years is that beyond neighborhood risk and personal borrower risks, the fragility of the financial system itself is a risk. Let’s be careful; if you’re out of business, you can’t do community development.

  3. Abdul Kyanika Nsibambi

    Dear Sir/Madam

    Centenary Bank is Microfinance Bank Ltd in Uganda, started in 1985 by the Catholic Church and now has expanded to the whole country with 51 branches. The Bank is targeting people in rural areas who are mainly farmers.

    The Bank is seeking for consultant to set up an Ag Department.

    Hope you will be interested.


    Abdul Kyanika Nsibambi

    Project Manager.

Leave a Reply

Your email address will not be published. Required fields are marked *