A personal history about the founding of the loan fund at WCCN

Carter Garber and his wife Marty Collier

By Carter Garber, Nicaraguan Community Development Fund Founder

I moved with my family to Nicaragua in 1986 to join Nicaraguans as they built a new future for their country. I worked in the largest Nicaraguan nongovernmental organization (NGO) at that time, The Council of Protestant Churches of Nicaragua (CEPAD). A decade of war – paid for with US tax dollars – frustrated my dreams and my Nicaraguan co-workers’ dreams to do community economic development. 

After the war and the 1990 elections, President Violeta Chamorra came into power with a coalition committed to dismantling the exciting changes (and the experimental mistakes) that millions in the country had struggled to bring about during the 1980s.

The new government’s most important act impacting credit was the systematic destruction of the Banco Nacional de Desarrollo and the Banco Popular. These two entities had provided credit to more than 100,000 Nicaraguan farmers and entrepreneurs. 

The World Bank, the International Monetary Fund and politicians in Washington, D.C. backed the Nicaraguan elite – who were regaining their pre-1979 status – as they dismantled a decade of local agricultural development.

At the same time, ideologically driven multilaterals (IADB, World Bank, IMF) heavily subsidized the new “private banks.” They assumed these banks would fill the credit vacuum resulting from the controlled implosion of the government-owned Banco Nacional de Desarrollo and the Banco Popular. They didn’t anticipate that, no matter how much they subsidized the private sector, the new private banks would restrict lending to their family businesses or members of their inner corporate circles.

With training in how to construct and maintain terraced seed beds and a $2,000 farming loan from the NCDLF, 40 women in El Viejo Nicaragua were able to purchase seeds to grow produce to feed their families and sell in the local markets. Photo by Paul Jeffrey

Farmers worldwide need to borrow at planting time and pay back after the harvest. Large and small industries need loans to buy inputs, which they can repay after selling finished goods. Microentrepreneurs need to buy supplies and pay back as they find buyers for their goods and services. But in the early 1990s, micro, small and medium size entrepreneurs and farmers suddenly were left without any credit at all. Businesses without credit quickly shrink, lay off employees and lack the confidence to rehire, as we have seen in the past few years.

In this context, the development organization (CEPAD) faced a massive number of credit applicants who had previously received loans from the national banks.  In the midst of the unanticipated depth of this crisis (heightened by world events such as the fall of the Berlin Wall), there was a need to act but fewer than ever resources to respond. Donations dropped as Somalia and Eastern Europe pushed Nicaragua off newspaper front pages. Fatigued with giving to Nicaragua during 10 years of insurrection against the dictator and another 10 of revolution and war, donors sought new horizons. CEPAD, which in 1986 had a $3.5 million dollar budget, shrank monthly as donors regretfully declined to contribute at past levels. The demand for credit rose; the ability to respond dropped.

Those of us who had spent years doing leadership and institutional development of an agricultural co-op saw, what we thought would be solid, folding in a period of four months after their credit was cut off. Once they could no longer grow food, people left the land and flocked to cities like Managua. The elite returned with money earned during their decade in the US and elsewhere and eagerly purchased land that the campesinos could no longer farm.

In this atmosphere of crisis, I responded as an ethical economist and suggested: Why not ask some of the millions of people who had visited Nicaragua during the 1980s to lend their money to meet the borrowing needs of Nicaraguans who want to work but cannot without credit?

For the past 15 years of insurrection, revolution and war, Nicaragua had been known worldwide as a place where money poured in by the hundreds of millions of dollars, but funds were not returned – and certainly not with interest and maintaining its dollar value. For that reason, most people considered me crazy for promoting this sustainable loan fund idea that would pay US investors back with interest. Most within the NGO world who had only known donations thought it was preposterous.

I designed and proposed the creation of the loan fund that would borrow money from US citizens and lend it to Nicaraguan farmers and entrepreneurs who would repay the principal and interest. Since CEPAD needed all its donations to minimize layoffs, I could not request donations for this new effort. This fund would have to be self-sustaining from the start, which would have been a challenge even for the private sector during a deep recession.

This new fund generated revenue to cover operational expenses from the margin of charging more interest to the Nicaraguan poor entrepreneurs than paid to the socially responsible investors.  In addition, we adopted a new policy of charging dollarized loans (which was unheard of in Nicaragua at the time) and tacking on enough interest to maintain the value during the regular devaluations (amounting to roughly 1% a month). Unless investors could get their principal back in dollars, they would not lend. And there was no one to subsidize the new loan fund.

That meant asking the poor to pay back enough to cover devaluation and inflation (12% a year) and to pay enough interest to cover operational costs in Nicaragua (just a few people to start with) and some of the operational costs in Wisconsin so that the loan fund could generate dollars to pay back the investors. We also had to earn enough on the margin to build a loan loss reserve and equity. I named the new fund Nicaraguan Community Development Loan Fund (NCDLF), since it was similar to community development loan funds in the US.

Although my Nicaraguan colleagues were skeptical, these were desperate times for credit with no obvious solutions, so my Nicaraguan boss, Armando Gutierrez, took the gamble.

Two loan funds were created in a 50-square foot room: the one of Working Capital for Community Needs (WCCN) to borrow from investors and PRESTANIC to lend to the Nicaraguan entrepreneurs and farmers. At the time, WCCN had a strong reputation and leaders were looking for a new way to carry out their mission now that the war had ended. 

When Sue Lloyd visited on a delegation, we talked about the community development loan funds in the US and our own success investing in them. After multiple drafts, we readied the paperwork for the NCDLF.

May 1994, CEPAD loan fund staff in their office.  From left to right:  Carter Garber, Mario Montiel, Zaida Peña, Rosa Amanda Vargas (photo by Susan Naimark)

In December 1991, Sue and I invested $60,000 to launch NCDLF, risking our own capital to help encourage others to risk their money. WCCN immediately looked for additional investors. In Nicaragua, we talked to many delegations each month about this new way to assist Nicaraguans and oriented people to contact WCCN to invest their funds in this job-creating fund.

With much trust and hard work, in less than a decade, the new loan fund became the biggest program of both CEPAD and WCCN. Eventually, CEPAD accepted my advice and spun off the fund into a separate microfinance institution, called PRESTANIC.

I continued as the general manager of PRESTANIC and oversaw the use of the fund for four more years in Nicaragua while training the Nicaraguan staff. We saw the money that was lent immediately go into effect to provide jobs and hopes to many Nicaraguans. We proudly lent the vast majority of the funds to rural areas where money was needed the most, a tradition that PRESTANIC continues 20 years later. Some of the entities that we lent to in those early years, like the coffee coop PRODECOOP, would not have survived without our credit in their early years and they have gone on to be leaders in the fair trade movement in Latin America.

Since we were among the few lenders in the country after the banks’ destruction, we always had a long line at our door. We did not just make microloans. We even lent a half million dollars to an agricultural bank that wanted to start up to help absorb the vacuum that had been created. We lent to the poor who few knew their names, and we lent to some factories every Nicaraguan today knows by name as they are industry leaders. Some called it “wild west lending” since both the re-contra and the re-compas walked the roads with automatic weapons in the areas were we lent.  In a couple of cases, armed groups burned the collateral for our loans, and the people still repaid. Why? The WCCN fund combined with PRESTANIC served as the financial lifeline they needed to survive.

In 1995, I finally accomplished my goal of working myself out of a job. As a social entrepreneur, I have founded many other social enterprises during the last couple of decades. The biggest challenge was founding the funds for WCCN and PRESTANIC, which required very large risks but yielded tremendous rewards. I have founded three other financial institutions but none have been as difficult as these two were.

WCCN and PRESTANIC deserve much credit for sustainable growth during the last two decades. They provide vehicles through which investors can lend in a socially responsible manner to those with few credit options. The investors also deserve accolades for risking their own hard earned money to improve the socioeconomic status of families they have never met. There is little in life more rewarding than helping people help themselves so that they can create jobs and income for others.