Micro-financing: Edward Jackson comments on how start-up loans to immigrant entrepreneurs uncover profitable business opportunities

Source: Globe and Mail (Report on Business)
Date: Wednesday, April 28, 2010

Panagiotis Tsiriotakis landed in Canada seven years ago from the sun-drenched, hilly isle of Crete, with no more than $200 and two drums of olive oil produced from his family’s groves.

He figured he would try to bottle the oil and sell it. His village in the Kolymvari Chania region is, after all, home to the oldest olive tree in the world, estimated to be more than 3,500 years of age. The olive oil, he says, is the “best in the world,” with its greenish hue and “kiss of fragrant Mediterranean air.”

Problem was, no one would give him a start-up loan.

“The banks didn’t want to see me. They all turned their backs,” Mr. Tsiriotakis said. “When you have zero, no one wants to help you. After, when you start making money, the doors open – but by then you don’t need them. Because I didn’t have a credit history, it made everything complicated.”

Then he heard about microfinance, a concept more commonly associated with the developing world. The aim is to provide credit and other financial services to low-income clients who lack access. It now reaches 175 million of the world’s poorest families in countries from India to Peru, many of whom start small businesses ranging from selling mangoes to providing cellphone services.

A local credit union in Toronto was offering small loans to people with low credit scores or no credit history, provided they formulate a business plan. Mr. Tsiriotakis applied, and got $5,000, which he used to buy bottles and pay shipping costs for more barrels of oil.

He worked out of his living room and used his Toyota Tercel as a delivery truck. Gourmet and health food stores became regular buyers. He paid back the loan, and got a succession of other loans from the credit union to expand.

Acropolis Organics now distributes almost half a million dollars worth of olive oil and balsamic vinegar a year into U.S. and Canadian markets. Mr. Tsiriotakis, 35, says he’s doing “very well,” acquiring a fleet of vehicles and holidaying in places like Brazil. He’s also a taxpayer who now employs two full-time and six part-time workers.

It’s a success story being played out across Canada as credit unions and community groups bridge the gap for entrepreneurial newcomers who can’t get a break elsewhere, pairing small loans with financial literacy and business planning help. Credit unions say it’s not just about corporate responsibility; they believe the practice makes business sense by creating loyal long-term customers who frequently move up the income ladder.

“Too often, microfinance gets treated as if it’s a charitable donation. It is not – it creates real benefits,” said John Lahey, president and chief executive of Alterna Savings, which gave Mr. Tsiriotakis his start.

Alterna has offered microcredit to about 340 business owners over the past decade. It has provided about $1.5-million in loans to people who wouldn’t otherwise qualify for traditional credit. The repayment rate isn’t as high as it is with traditional loans such as mortgages, but it still exceeds 90 per cent. And the credit union estimates the program has brought more than $1-million worth of additional business in products such as mortgages.

Mr. Lahey, himself a banker who spent 25 years at CIBC before joining Alterna, has become a microfinance champion. He wants to see it become a national initiative, offered by banks and credit unions across the country. He also wants the federal government to assist, through subsidies or by helping financial institutions allocate more resources to the program.

“It’s good public policy. It helps create jobs and get people off social assistance,” he said.

Alterna’s microcredit loans have helped start everything from staffing and job placement firms to tech support, landscaping, auto maintenance, catering and eco-fashion. A recent study by Carleton University, based on a sample of 47 Alterna loan recipients, found that a fifth moved off social assistance after receiving loans, while two-thirds saw increased incomes, and 60 per cent hired others to expand.

Canada’s big banks have so far been reluctant to move into the sector, although Royal Bank of Canada plans to try it out in Toronto. Bank of Nova Scotia, with one of the largest market shares for smaller Canadian businesses, runs microfinance programs through its Latin American subsidiaries, but none in Canada.

Edward Jackson, associate dean of research in Carleton’s faculty of public affairs, says his research has uncovered business opportunities in reaching out to immigrant markets.

Microfinance gives institutions a chance to “accompany these folks along the path of economic success,” he said. “As they move along that path … a good percentage will keep moving forward, getting better housing, for which they will need mortgages, generating more income, building their businesses, hiring individuals – and telling others about it.”

Vancouver City Savings Credit Union can testify to this. It offers loans to immigrants who lack a credit history and to lower-income residents; repayment rates exceed 96 per cent. The recession and its impact on immigrant job losses has caused applicants to spike.

A micro-loan can help “begin building a credit history and work towards economic self-sufficiency for newcomers,” said Catherine Ludgate, manager of community business banking at Vancity, who is fielding more calls from communities that want to start such programs. This month, she met with a start-up of newcomer Filipino immigrants who want to set up a lending system into their community.

Vancouver resident Nick Noorani welcomes this trend. He landed in Canada from Dubai in 1998. An unexpected layoff in 2003 put his wife and him in danger of losing their home, until Vancity stepped in with a small loan. He used the funds to start Canadian Immigrant magazine, a publication that has since been bought by Torstar. The loan let him hold on to his house, grow a business, boost his income and hire five others. “I would have closed at the second issue if it hadn’t been for that loan,” he says.

Mr. Noorani wants to see the idea grow. “Microfinance could change the lives of immigrants through this country,” he said. “We know a lot turn to self-employment because they have a hard time getting jobs, and this could be the perfect fit for them to start small businesses. The banks should start waking up to this. And immigrants are a market everyone wants.”

Mr. Tsiriotakis, the exuberant olive oil distributor, is sticking with the same credit union that gave him his first break. “Now that I’m making money, everybody wants to be my friend,” he said. “But why should I give them my business now? I’m staying where I am.”