Economy

"Our human destiny is inextricably linked to the actions of all other living things. Respecting this principle is the fundamental challenge in changing the nature of business."
- Paul Hawken, The Ecology of Commerce

 

A SUSTAINABLE ECONOMY
- = Sustainable Economy Initiatives = -

Socially Responsible Banking Fund

The Socially Responsible Banking Fund of the Vermont National Bank/Chittenden Bank enables ordinary depositors to lend their money to small businesses, farms, schools and affordable housing initiatives which make a positive contribution to their communities.

Origins

Back in 1988, the staff at the Vermont National Bank's trust department started noticing that an increasing number of clients were asking questions about the social implications of their investments. They wanted to ensure that their money was not being invested in companies with poor environmental records, or which were producing tobacco. In response, the bank offered a 'screened investments' portfolio to clients holding large sums of money. The concern was also being expressed by clients with smaller deposits, however, and it was clear that social investing was growing in popularity. At the same time, some local Brattleboro citizens approached the bank to make loans for socially responsible businesses. (Brattleboro is a small Vermont town of 12,000 people, where the bank is based). A new president, Rick Hashagen, had just taken over, and was looking for something to differentiate the bank from others and carve out their own market niche. At the time, the Vermont National Bank was the second largest bank in the state, with $700 million in assets, and 26 branches. Led by three of its top executives, the Bank set up a Community Advisory Committee to develop specific investment guidelines, and the Socially Responsible Banking Fund was established in 1989.

Aims and Objectives

The purpose of the fund is to offer individual depositors a unique banking option which can meet both their financial goals and their social concerns, harnessing the power of private capital to finance socially, fiscally sound enterprises, and bolstering the social capital of the community. The SRB Fund is targeted towards investments in local Vermont businesses, non-profits and other institutions which are making a positive contribution to the environment, their communities, and their employees. Investments are not held in companies which have a negative record in the areas of energy, employee relations, the environment, alcohol, tobacco or gambling, or companies involved in military weapons production.

Activities

As soon as people learnt about the fund, deposits started to pour into the bank, from both inside Vermont and all over the USA, often arriving in cheques of $10,000 or $20,000. Within 4 months, $7 million had been deposited in the SRB Fund, and by the end of the first year, this had swelled to $34 million. Depositors can open regular checking, savings, investment, business or non-profit accounts. Loan requests are reviewed for both their social and their financial criteria, and the Fund's deposits are lent to small businesses, non-profits and community institutions in five areas :

(a) Affordable Housing, including mortgages for low and moderate income families, community land trust properties, limited equity housing co-ops and condominiums, and non-profit societies whose focus is the provision of permanent affordable housing, such as Rutland West Neighborhood Housing society, which helps potential low-income home buyers manage their credit and credit history so that they can become bankable loan applicants. The society has a $1.25 million line of credit with the SRB Fund.

(b) Environment and Conservation, to provide financing to enterprises and non-profit projects which have a positive impact on the environment and are committed to the long-term responsible use of the land.

(c) Organic and Sustainable Agriculture, to provide financing for projects which provide innovative, sustainable and environmentally sound models of family farming. The Northeast Organic Farming Association of Vermont is working with the SRB Fund to oversee a revolving loan fund for its members, some of whom are small farmers trying to turn their dairy farms into organic operations. Organic milk brings a higher price than regular milk, and suppliers cannot meet the demand for it, but before the SRB Fund came along there were very few banks which were interested in lending for such a purpose.

(d) Education, to assist individuals and organizations providing daycare services, educational consulting, curriculum development or alternative educational options.

(e) Small Businesses and 'Dual Bottom Line' Businesses, with an emphasis on women and minority-owned businesses, businesses with creative models of ownership and profit-sharing, and businesses providing jobs, training or services which benefit low-income members of the community. In order to reach micro-businesses needing loans smaller than $5,000, the SRB has established a relationship with a local non-profit society which administers peer-group lending circles.

Structure

The SRB Fund is administered by a Director within the bank, and advised by a Community Advisory Board consisting of local citizens who are active in business and social change activism. Loans are managed by the bank's loan officers, who have been specially trained to understand the Fund's operating philosophy. One of the keys to the Fund's success is its emphasis on building personal relationships, instead of following a computerized formula with fixed loan structures and approval criteria. The Fund's officers may spend longer studying a borrower's financial needs and special problems, in order to craft the best lending package. The pay-off comes in from the almost non-existent rate of loan-delinquency, which results from the stronger relationships that have been formed. These encourage a borrower to share any potential problems with the Fund, instead of hiding them until they are too late to fix. This new approach to banking required some effort to show the loan officers that it was possible, and involved quite a change to the internal culture of the bank.

Finance

The SRB Fund does not try to provide cheap loans, and nor does it provide equity capital : it is strictly a cash-flow lender. The Fund's staff do have the flexibility to provide loans that are lower and longer than the normal market rate, if need be. Loans are categorized into 3 lending priorities - high, medium and low; if necessary, the loan officers will work to put together a "Mix and match" deal, especially for non-profit societies.

Performance

The performance of the Fund has exceeded everyone's expectations, in terms of deposits, loans and loan performance. Between March 1997 and March 1999, the number of investors has grown from 11,000 to 29,300 (95% of whom live in Vermont). Approximately 75% of this is new money, and 25% has been transferred into the Fund by the bank's existing customers. In March 1999, the Fund had deposits of $229 million, and was investing in 107 commercial, multi-family housing projects; 216 family mortgages; 23 environmental initiatives or enterprises; 97 agricultural initiatives; 111 educational initiatives and 1,499 small businesses. The total amount invested was $145 million, yielding an average 8.15% return to the Fund. The total holdings of the Fund were $245 million, with the additional $99 million being held in Federal Home Loan bank stocks and notes, housing loans pending sale, Fannie Mae (the federal housing corporation) and the Federal Farm Credit Bank. The loan delinquency rate for loans over 90 days was zero per cent, proving to the bank and many others that this is a very viable form of community banking. 99% of the loans were within Vermont, and 1% in New Hampshire. The Fund has given the bank a stellar public image, and a clear market differentiation. The City of Burlington, Vermont, has put its entire bankroll into the Fund, in return for which it receives a conventional rate of interest on its deposits, and the Fund has agreed to make loans for community-minded businesses and initiatives in Burlington.

Future

In December 1998, the Vermont National Bank's holding company, Vermont Financial Services Corp., signed a $454 million stock-for-stock merger agreement with Chittenden Corporation, headquartered in Burlington, Vermont. The new owner has expressed a firm interest in the SRB Fund, which will continue to operate under the new ownership. The merger means that the Fund will expand into new geographical areas in New Hampshire and Massachusetts, and that regional SRB loan officers may be established. Over 60 banks in North America have made enquiries about the fund, and three somewhat similar funds have yet been established by the Community Bank of the Bay (San Francisco), the Bank of Newport (Portland, Oregon) and the Wheeling Bank of West Virginia.

For further information contact :

Alex Potter,
Socially Responsible Banking Fund,
PO Box 804,
Brattleboro, VT 05302, USA

Tel (802) 258-4096
Fax (802) 258-4095

apotter@vnb.com
www.vnb.com


Written by Guy Dauncey for The Planning Exchange, Glasgow, Scotland.

guydauncey@earthfuture.com