Where The Dough Goes

Rating: NNNNNif investing your hard-earned dough requires public trust, then there must have been a horde of rattled RRSP contributors.

Rating: NNNNN

if investing your hard-earned dough requires public trust, then there must have been a horde of rattled RRSP contributors this year.From the Enron fraud to — lest we forget — Nortel and its vaunted homegrown wonder-stock that bled millions of portfolios when its share value plummeted, fear of fleecing was certainly at the top of everybody’s mind.

In a world of ebbing corporate confidence, some community-minded Canadians are considering going local, trusting their savings to the small business down the block. Unfortunately, they aren’t getting much help from the feds.

While the government permits individuals to invest up to 30 per cent of their RRSPs abroad, federal officials are showing a shocking lack of interest in helping market-based mechanisms like community loan funds.

“We find it patently unfair that the government allows Canadians to invest in international markets while prohibiting them from investing in their own communities,” says Eugene Ellmen, executive director of the Social Investment Organization (SIO).

“Most investments are made through RRSPs, (so loan funds are) shut out from the largest pool of savings Canadians have. Investments made through RRSPs give individuals tax benefits, so contributions to loan funds would likely increase if they were RRSP-eligible.”

Loan funds’ ability to feed small local businesses seems like a monetary miracle. Ask Amanda Jordan, a self-employed contractor in east Toronto who scooped up a community loan and forged a unique business niche.

Working in the renovation trades, Jordan discovered that many older women living alone are more comfortable inviting a woman contractor into their homes. So she began marketing her carpentry, electrical and renovation skills as the “handy-woman” service that puts seniors at ease. Starting with only a toolbox and her car, she tried to get bigger, but her loan applications at the banks “got turned down, turned down, turned down,” she says.

Then she attended an event hosted by the Riverdale Community Business Centre, a non-profit group that was promoting her company, A Grade Up, in Riverdale. “I realized I needed a truck, and they were there with a loan,” she says.

Community loan funds like Riverdale’s inject start-up and expansion capital into low-income businesses that lack a credit history. “These funds can have a significant social and economic impact,” says Ellmen.

Riverdale supports its loan fund with a range of services that connect entrepreneurs with each other and with consumers. Because banks are constrained by lending rules that prioritize credit history, and because they don’t build community networks, says Riverdale executive director Kevin Perkins, they miss opportunities.

To select loan recipients, Riverdale starts out like a bank, looking at business plans, cash flow projections and past performance. But to see the potential, a funder has to look beyond numbers on a page.

“They came to my house and talked to me. They saw the work I was able to do. The banks didn’t do that,” Jordan notes. Once approved, her loan was guaranteed to the Metro Credit Union (MCU). Although MCU distributes the money and collects payments, the risk-protection guarantee comes from Riverdale. How does a small non-profit group assure a billion-dollar credit union? With the support of individual investors, without whom the program could not exist.

“The money we receive from investors is used as collateral to secure small-business loans issued by Metro Credit Union,” explains Perkins. Capital funds consist of term deposits that are protected by a loan-loss reserve worth 20 per cent of the fund’s total portfolio value. To build this high level of assurance against default, the reserve fund takes donations.

Returns on investments in this sector — RRSP or no — may be secure (simple interest), but they’re small, in the 2 per cent range, similar to various bonds and GICs on the market. Borrowers also bear some of the risk, paying higher service charges — prime rate plus 5 per cent, 4 per cent of which helps to cover costs.

Riverdale reports a low default rate, and in the United States, where community investment happens on a much larger scale, loan funds are an important part of urban redevelopment. Investment initiatives (including micro-loans, social venture capital and other vehicles) have raised $7.6 billion U.S. for American cities, according to a U.S. group, the Social Investment Forum.

Why doesn’t Canada encourage RRSP eligibility in loan funds? Department of Finance Canada worries include potential “self-dealing” by small business owners who could invest in the same fund from which they receive a loan.

In a March 6, 2001 letter, a director from the tax policy branch told the Jubilee Fund, a community loan fund administered by Assiniboine Credit Union of Manitoba, that “rules generally seek to ensure there is some reliable guarantee for the investment or that an acceptable level of oversight of the issuing entity or of the investment itself is in place.”

The SIO argues that sufficient risk-management procedures exist. Says Ellmen, all that’s needed are simple rules “that guarantee a proper loan review and adequate reserve funds.” The SIO and the Jubilee Fund are lobbying to make the possibility of investing down the block a reality for RRSP season 2003.

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