Alterna Savings & Credit Union in Ontario was the second credit union founded by Alphonse Desjardins in Canada.  Alterna originated as a civil servant common bond credit union and has long since become a community-based credit union. 

Today, Alterna is one of the largest and most successful business lending credit unions in Ontario.  While most banks and large credit unions in Ontario reportedly lend about 25% of their portfolios in business loans, Alterna’s business lending is in the low 40% range.

We visited with Christine Racine and Richard Krzyzanowski, who work in Alterna’s highly successful business lending department.

Business loans at Alterna may be as small as a $1,000 overdraft for self employed members or as large as $20 million for real estate construction development.

Business loans fall into three categories.  The largest are construction funding for residential or industrial buildings.  The lower limit on construction development loans is $1 million; for loans over $10 million, the credit union syndicates with other credit unions.  This is real estate mortgage lending.  Alterna keeps such loans focused on assets easily traded.  Examples are apartment buildings, shopping centers and office buildings.  Lenders are more cautious about lending to specialized ventures such as hotels, self storage facilities or car washes because these are not so easily sold to third parties.

The credit union looks to see what other activities of the borrower or family members are financed by the credit union and enforces connected approval limits.  The credit union’s risk rating software summarizes the loan to value (typically not more than 65%), debt service, credit history, financial capacity of the borrower and then scores loans for perceived risk.  The credit union monitors ongoing loan performance and reviews at least once per year any loan over $500,000.

The second category and smallest loans are micro enterprise loans.  These are typically provided to members who are on a government subsidy, do not qualify for credit through traditional means but have a strong business case and an entrepreneurial spirit.  These are riskier as most do not have positive net worth, and loans are not secured by the owner’s home or real estate.  Loans are unsecured and based on character.  The credit union made a commitment to implement the program in keeping with its community spirit mission and vision.  These loans have a higher default rate.  Delinquency can be as high as 20% in this part of the business portfolio, but most members eventually work their way out of the delinquency because they want their business to succeed and to maintain their relationship with the credit union.  On average, over 90% of these loans are repaid in full.  While labor-intensive, these loans have proven to make significant differences in the lives of the participants and the community as a whole.

The third part of the business portfolio is made up of loans to small and medium-size businesses.  The early lending to this sector was often started by taking a mortgage out on the member’s home or business.  After successful repayment, the borrower has established a history with the credit union.  Loans require an analysis of the risk of the business, the experience of the borrower and the projected cash flows. Underwriting, however, continues to often require the security of some tangible assets.  The monitoring of unsecured loans are not easily automated; the credit union needs to find ways to identify businesses and then get to know them to filter the risk. A valuable safety check on such business loans is to convince the borrower to have all of their financial services at the credit union.  Then the financial behavior of the member can pattern payment behavior or trip alarms if the member becomes financially distressed. 

Included in this portfolio are loans to NGOs, non-profits and cooperatives.  Since these groups tend to have a goal to improve communities, there is a natural fit with the credit union.  They are actively becoming involved in these organizations and offering services tailored to their needs.

I received a Tsunami warning notice for the Solomons.  It reminded me of the last trip we made to the Solomons after a Tsunami hit some of the more remote islands.  People had worried about whether their families were safe or not and had to hike for hours and travel very expensively by boat for days to reach the remote villages. 

We had flown into Henderson Field on Guadalcanal.  The credit union folks met us there.  We visited a number of credit unions in Honiara, most of them employee-based credit unions.

A few days later, we showed up at Henderson Field again.  They weighed our overnight bags and then told us to stand on the scales so that they could weigh us as well.  We climbed into a small flying contraption: a biplane with propellers mounted on the higher wing, one to each side.  The seats were five small benches that could seat one person comfortably and two people in a pinch.  “You sit here on the left side of the first bench; you sit there on the right side of the third bench” the person who had weighed us directed according to some plan in his head.

We took off and flew out over the water, across the slot toward Malaita Island.  We had large windows.

“If we crash on the water, pull in on the top and kick out the bottom of the window like so and swim away from the plane,” our seat planner had instructed. 

“He’s joking right?" I asked.

No answer.

As we approached the island, the plane first buzzed the airfield twice to drive the grazing cows off. 

After landing, we transferred to a couple of four-wheel drive pickups and visited the community credit union.  The Credit Union Foundation of Australia had organized savings clubs in the more remote villages.  The pickups took us into the hills, where we dismounted and walked along the trails to the villages.  The children and young men hid in the jungle and popped out brandishing spears and arrows in traditional welcoming. Initially skeptical, I was won over by the fact that the community had built its own community center to house the savings group as well as the craft workshop.  It was distant, but the foundation had donated radios to the credit union and to the village savings clubs.  The radios now became the means by which the villagers could communicate with their families to let them know they were safe.

The students whose school fees were financed through the credit unions were quiet and difficult to draw out.  School was ok they said, but it was hard to study at night because there was no electricity. 

So we installed electricity.  We installed a septic tank and floor toilets as well as drainage pipes to connect to underground sewage pipes.  We put in place a kitchen for food preparation and set up a food basics support allowance.  The orphanage bought food staples such as maize, flour, sugar, dried milk, dried sardines and beans. Weekly menus are planned and posted.  The children now eat three square meals a day.

Once the children have food in their stomach on a regular basis, the difference is huge.  The children are talking and laughing with each other.  They play soccer, jump rope and chase each other in the courtyard.  The children attending school on the credit union scholarships are studying at night and participating in class.  They talk of going to the university and what they want to do with their lives after school.

We started with 47 children in the overcrowded orphanage.  Now that conditions have improved, the local government officials have brought over more children to the orphanage; there are now a total of 67 children living there.

Cell phones.  Everyone has them.  Everyone is familiar with how to use them.  Illiteracy does not mean innumeracy.  They are everywhere, always on, immediate.  They are a constant presence, and they are very personal.  The poor have them.  Merchants have them.  An opportunity for business exists.

Where people can buy (top up) prepaid airtime for their cell phone, they can carry that electronic stored value until they use it.  Or … they can transfer it to someone else.  People who came to the city to work can call their mother’s telephone number and transfer some of the stored value from their phone back home to their mother’s phone number on Mother’s Day. 

Buying cell phone time becomes a popular business.  Everyone is buying, and everyone starts selling … stores, gas stations, restaurants and credit unions.  And you can sell back your phone time … someone sent you cell phone time to your phone, and you want to convert it to cash.  So you go into a store and for a fee you transfer the electronic stored value to the store owner’s phone, and he hands over the equivalent cash.  So cash-in, cash-out networks grow, and the key to success is the number of points of sale in the network.  The more the points of sale …  the more convenience to the cell phone owners.

Remember that merchants have phones too.  So you go into a shop, and you want to buy a coffee or a sandwich or groceries.  Not enough cash in your pocket. No POS device in the store.  You dial the store owner’s number and transfer to her phone the electronic stored value of the cost of those goods.  Commerce becomes an electronic exchange of stored value over the phones.

Now the challenge is to link this to financial services. Remember we are at the bottom of the pyramid, so we are not using smart phones that do home banking via the Internet.  If the credit unions can be more than another gas station or neighborhood store that sells cell phone time, they can offer people access to their savings or loan accounts … receive electronic stored value and save some of it to one’s savings or make a loan payment or transfer disbursed loan funds to make a purchase.