Supporting credit unions could be the way for foundations to practice a more equitable and inclusive approach.
Jeremy Beer’s recent three-part essay on rural philanthropy highlighted a litany of problems facing rural America – a lack of economic opportunity, opioid addiction, soaring health care costs, debilitating chronic complex disease, out-migration of youth fanned by excessive student loan debt and a decline in local banks, among others.
In Maine we know this all too well. We have a slow growing population that is older, unhealthier, and whiter than it should be. Our rural areas are no strangers to out-migration and to diminished economic outlooks.
But Mainers don’t stand still. For decades we have welcomed those seeking a less frantic urban life. My parents were part of the arts and crafts immigration after WWII. I came of age during the Back-to-the-Land movement of the 1960s and 70s. At present there is another wave underway with new farmers seeking relatively cheaper land.
The mix of hardscrabble rural and new hope idealism has produced institutions with vision and the sophistication to attract philanthropy. Maine has a burgeoning farm to table movement, a booming restaurant scene, an exploding craft brewing and distilling marketplace and a vibrant artisanal cheese environment.
Passion, expectations, energy are all high. But money is often the missing factor.
So, several years ago a few of us started to contemplate what could be done to bring money and lasting, robust impact to the rural economy of Maine. Scott Budde, a former bank analyst and portfolio manager of TIAA’s impact investing programs in New York City; John Sharood, a former G.E. financial operations executive with international experience; and I, a former Silicon Valley and Wall Street technology analyst, all came to the same conclusion – we needed to create a credit union for Maine’s new food economy.
We put our heads together and came up with the idea that has grown into Maine Harvest.
“Get big, or get out” for the banking sector
Between 1992, the top 100 banks in the U.S. controlled 41% of bank assets. All other banks (community, regional, etc.) accounted for 53%. By 2017, the top 100 banks held 75% market share, all non-top 100 institutions held 18%. In that same timespan, the credit unions’ market share grew from 5.6% to 7.1% showing an increase of 25%.
The conclusion from these numbers is that, with the exclusion of the credit union system, any bank that is not in the top 100 is a dead man walking. Local banks, both small and large and not in the top 100 club, have seen assets do nothing but plummet. What was once well more than half of the market share is now in a free fall heading to single digits.
The trouble is that it’s the regional banks (not the ones on the 100 club) that are best suited to understand the business model of farming. One hundred years ago there would have been a wealth of local financial institutions who understood their local economies—in our case, sustainable farming. But today, the lack of such institutions, caused by a complicated and stifling regulatory regime, means that small farmers trying to grow their production often go unfunded.
The government’s “too big to fail” response to the 2008 financial crisis has done absolutely nothing to address this catastrophe. It’s Earl Butz (Nixon’s head of the US Department of Agriculture) and his blunt admonishment to American farmers in the mid-1970s, “get big, or get out,” now applied to the banking sector.
Only credit unions form a sort of bulwark to this onslaught. Credit unions are regulated, audited, chartered, and insured by the full faith and credit of the US government. And it’s a fine example of a regulatory function well performed by the state. Our banking system really works, as long as it’s not concentrated into an oligarchy.
Small is beautiful
While credit unions have grown in assets and deposits and members, the number of credit unions has plummeted from 28,000 in the 1970s to less than 6,000 today. Some of this is only to be expected, as our cultural and structural push for the big, the global, and the scalable seems to be paramount to the “small is beautiful” approach that can support our local food economies.
Credit unions arose from the needs of communities associated with small businesses, but many of these bonds have fallen by the wayside in modern America under pressures to “scale up.” Credit unions now represent groups of loosely associated members – we no longer belong to tight-knit communities but live in neatly isolated cul de sacs.
This has all led to a rather strange situation in that credit union membership is growing, deposits are growing, utility is growing, but the number of institutions is decreasing and the “associational bonds,” the glue that brought people together, is weakening.
Government regulators love the fact that there are fewer credit unions, as it makes their jobs easier. They tend to choke dynamism and to favor more efficient span and control for their regulatory regimes.
The social promise of credit unions
The tax-exempt status of a credit union, which is a 501 (c)(14), is an implicit recognition that they perform useful social functions. Credit unions have been working for years in unserved and underserved communities to help residents overcome what seem like insurmountable financial conditions. Unlike for-profit banks, credit unions are not-for-profit member-owned, and their primary goal is to serve their members financially rather than deliver a profit for shareholders.
The first credit union was formed in 1908 at St. Mary’s Catholic Church in Manchester, New Hampshire (by a priest from Maine). By 1934 a nationwide structure was put in place under FDR that fostered the rapid rise in credit unions through the 1970s.
It was not too much to ask of American business and government and society to permit citizens to self-organize around a community or a geography or an association for the purpose of providing credit to one another.
That is, until the saving and loan debacle in the 1980s. And the repeal of Glass Steagall in 1999. And the great melt down of 2008.
Today, starting a credit union is a long and arduous process.
But when John, Scott, and I surveyed the situation in Maine and the nation, it struck us that the credit union platform could serve well as a means to organize support for local farmers by providing capital for land access and business and equipment loans.
Startup capital: where philanthropy comes in
In the “old days,” credit unions were created from funds at bake sales and a shoe box passed around at a union hall meeting. It didn’t require much money to get one started. But that’s no longer the case.
With major consolidation and the emergence of “too big to fail,” government regulators are understandably cautious about insuring deposits for new institutions. The specific business model of Maine Harvest, with much of the planned loans dedicated to long-term farmland mortgages, means we need to have a high level of startup capital.
These factors require Maine Harvest to clear a high bar. Our operational model calls for us to raise $1.8mm in startup capital to secure our projected loan portfolio and to spend $600k in expense losses over the first 6 years until we reach sustainable profitability. So how do you raise $2.4mm in funds?
We’ve turned to philanthropy for the startup capital.
By using their mission-oriented, tax-advantaged wealth to fund the creation of a cooperatively-owned and managed credit union, philanthropic foundations can provide the seed money necessary for small and mid-sized farmers and food entrepreneurs to be able to compete under the pressures of the market and get them on the right footing to succeed.
The startup capital that will anchor Maine Harvest will pass from philanthropic organizations to two partner 501 (c)(3) organizations, The Maine Organic Farmers and Gardeners Association (MOFGA) and the Maine Farmland Trust (MFT). Then the funds will come to Maine Harvest and form the 501 (c)(14) credit union. Once chartered and funded, Maine Harvest will be a standalone, independent entity, much like a credit union formed for a police department which once chartered is in no way a part of the police force or function.
A huge cultural chasm
As it turns out, however, this structure can be a tough sell for foundations.
For one thing, most philanthropic professionals have never ventured inside a credit union. So when you get to the meeting, frames of reference can be shaky. There is a huge cultural chasm between (mostly white collar) foundation professionals and (largely blue collar) credit union members.
In philanthropic circles, there is a lot of talk about trying to become more equitable and inclusive. As Ford Foundation program officer Christopher Cardona mentioned in his introduction to Cynthia Gibson’s fascinating report on participatory grantmaking, people are becoming distrustful of established elite-driven institutions, including foundations, and top-down decision-making is increasingly viewed with suspicion, if not outright hostility.
Donating for startup capital to form a credit union could be just the kind of thing to bridge the cultural gap and shift the financial decision-making power over to a member-owned co-op such as a credit union.
However, this would require for foundations to be willing to re-examine their practices and assumptions. I have an MBA and I spent many years in Silicon Valley as a Wall Street type. I can’t help but feel that the professional managers of philanthropy have well internalized the MBA curriculum and morphed philanthropic goals to rational, for-profit business structures. Therefore, they struggle to comprehend a good, old fashioned member-owned cooperative. If they’re going to spend a lot of money, they want it to be scaleable. Any for-profit investor knows that.
But credit unions are not scaleable. They are replicable.
If foundations want to support more bottom-up, inclusive initiatives, perhaps it’s time that they start thinking about duplicating many small efforts rather than scaling up fewer large projects. A “small is beautiful” approach is not only good for agriculture and banking, but perhaps also for philanthropy.
As for Maine Harvest, our success has come from several committed donors in Maine and a smattering of others around the country. As Jeremy Beer noted in his aforementioned essay on rural philanthropy, the commitment of our foundation supporters is particularly noteworthy since it means that these institutions have realized that “if they want to truly serve rural people,” they need to “get out of their expensive ergonomic chairs and into the field.”
It has not been easy, but we are nearing success with $2.2mm of $2.4mm in hand. We hope to close this off in the next month and to submit the final application materials in mid-2018. With some luck and more hard work we should be in a position to receive our charter and deposit insurance in 2019. Stay tuned!
 Organizations like The Maine Organic Farmers and Gardeners Association (MOFGA) are graduating dozens of young organic farmers every year. The Maine Farmland Trust (MFT) has philanthropy-enabled funds to buy development rights for transitioning farmland.
 The challenge we observed is that small- to mid-level farmers and food producers who want to scale their operations face difficulties acquiring capital loans from banks, which have very little knowledge of the risks and opportunities involved in food production, and shy away from providing loans to farmers. And, as Eduardo Andino has noted previously at Philanthropy Daily, government programs such as the USDA Farm Service Agency provide low interest loans, but they have specific (and often frustrating) guidelines and regulations.
 While they’re exempt from federal taxes, credit unions also differ from 501(c)(3) tax-exempt nonprofits in that they do pay state, local, property and payroll taxes. But much like 501 (c)(3)’s, however, they have volunteers serve on their Board of Directors, not paid employees.
3 thoughts on “Credit unions: the not-for-profit structure that philanthropy should note”
Thank you Florian! The credit union movement indeed emerged from Germany and France and the UK 200 years ago. The historical record makes for good reading and helps all of us to re-imagine the proper place for cooperative credit in the present. It’s great to see what is happening in Germany at present in the link you provided.
Here in New England credit unions emerged from the migration of French Canadians to our mill towns in the 19th century with ideas from the Continent and its mid 19th century struggles. The first credit union in the US was organized in Manchester New Hampshire in 1909 at a Catholic church, led by a priest who came from Maine. Later in 1909 Massachusetts passed a state law authorizing the formation of credit unions statewide. The two men who led that law were Edward Filene, a Hungrarian Jewish immigrant whose father had started a retail clothing business in Boston that became very large. The other man was Pierre Jay, whose ancestor, John Jay, was a signatory of the US Declaration of Independence. Jay was a graduate of Yale and head of the Massachusetts Banking Commission. He would become the first president of the New York Federal Reserve Bank. He was a “big money” man who correctly understood the need, and right, of citizens to self organize for credit purposes. We need movements of people and leaders.
So we owe a lot to the history from Europe and to pioneering movements led by individuals. Of course, when promoting the idea of a credit union in Maine we don’t look to provide a lesson in history, so we often talk about Franklin Delano Roosevelt and his New Deal, which set the framework for credit unions across the US.
So thank you for reminding us of the deep historical roots of credit cooperatives! We want to understand the historical, and the current, context. I deeply appreciate the chance to familiarize myself with what is happening in Germany today!
Greetings from Germany and as a former banker who served his apprenticeship at a cooperative bank and now turned NPO consultant, I can only send my congratulations to you and wish your business (further) success.
The idea of credit unions is in fact much older and was invented by Friedrich Wilhelm Raiffeisen more than 200 years ago in Germany. His idea was celebrated last year here (https://raiffeisen2018.de/) and the idea of „Cooperative Banking“ is now part of the Intangible Cultural Heritage of Mankind.