Schwab Fellows of the World Economic Forum The Innovation ShoreBank refers to a set of companies grouped under the holding company, ShoreBank Corporation, the first and leading community development financial institution in the USA supporting economic equity and a healthy environment. ShoreBank started out as an experiment in 1973, but it has had far-reaching impact on the structure of the banking industry in the USA and abroad ShoreBank was created by Ron Grzywinski, Mary Houghton, Milton Davis, and Jim Fletcher Although none of them claimed to know much about banking, they believed that a commercial bank, flanked by complementary development organizations, could restore neighborhood economies, including many of those in their hometown of Chicago. In the 1970s, they purchased the South Shore National Bank on Chicago’s South Side. The bank had been losing deposits and staff, blaming its downturn on racial change in its neighborhood. For the first few years after buying the bank, Ron, Mary, Milton, and Jim focused on gaining the trust of the local community and revitalizing the investment climate. As a result of their efforts, the bank booked loans to good borrowers after a careful assessment of local property values, encouraging the market to normalize. More lenders entered the market and property values in South Shore rose faster between 1970 and 1980 than any other community in Chicago. In 1985, then Governor Bill Clinton asked ShoreBank to help start a community development bank similar to ShoreBank, in his state of Arkansas. The governor was so impressed with the impact of their efforts in his home state that when he became US President, he enacted federal legislation that spawned the Community Development Financial Institution program, spearheading community development banks across the USA. But already in the early 1980s, the co-founders of ShoreBank began to look beyond national borders to expand their model. In 1983, they signed their first consulting contract to advise Muhammad Yunus at Grameen Bank in Bangladesh. Today, ShoreBank, headquartered in Chicago, is a USD $2.4 billion company that owns, operates, invests in, and advises development banks around the world. Background The founders of ShoreBank set out to change the social forces that led to declining neighborhoods, rudderless lives and hopelessness. To do that, they had to turn the banking industry and public policy related to it, upside down. The most important drawback to achieving their goals through the formal banking system at the time was the issue of distribution of the profits. Ron and Mary wanted to reinvest a significant portion of the profits to expand the program so as to widen its social impact. So they set out to start a different kind of bank. They seized the opportunity created by an amendment to the 1971 Federal Bank Holding Company Act, which expanded permissible activities for bank holding companies to include investment in community development corporations. Under that amendment, they asked, could a bank holding company be a community development corporation? When they bought the South Shore National Bank in 1973, they applied the law to create a new kind of bank which has now spread around the world - the community development bank. Strategy From the outset, Shorebank’s primary purpose has been to do development work and not to maximize financial returns or capital for its shareholders. Of course, it must also be profitable to meet regulatory requirements. This tension has been less of a problem than one might predict. In the early years, turning a profit was a key to survival, but that profit was the vehicle for attaining large-scale impact for low income clients. Grounding in a set of values and principles which now encompass conservation as well as community development - along with a culture of pragmatic innovation and experimentation - has been essential to sustaining ShoreBank’s mission and entrepreneurial heart. In reality, the bank’s most mission-focused lending is also its most profitable. In 1990, ShoreBank launched its first long-term international program, the ShoreBank Advisory Services (SAS) beginning in Poland, and expanding to Russia, Bulgaria, Azerbaijan, Armenia, Romania, Georgia, India, Jordan, Kenya, Mexico, Nicaragua, and Northern Ireland. As the work matured, SAS in 2006 became ShoreBank International (SBI). Shorebank also created a private investment company, ShoreCap International (SCI), with an international set of shareholders that made minority equity investments in 16 locally managed African, Asian and eastern European regulated financial institutions specializing in small business or microfinance lending. A non-profit capacity building affiliate, ShoreCap Exchange provides technical assistance and peer-to-peer learning opportunities among investee institutions and more broadly in the microfinance and small business lending field. The Entrepreneur Ron Grzywinski grew up in a blue collar neighborhood on the South Side of Chicago. Of Polish background, he graduated from college without ever having taken a business course and went to work for IBM selling computers to banks in the Chicago area. The work left him uninspired and in 1963 he got a job with a small banking group and was assigned to its bank in Lockport, Illinois. Three years later, he was its President. At that time, the owner of the bank in Lockport became interested in buying another bank in the Hyde Park neighborhood of Chicago, home to the University of Chicago and a rare American instance of a racially integrated neighborhood, albeit one surrounded by African American neighborhoods. For the first time he became really conscious of racial divisions in the US. Ron brought in Milton Davis, an African American civil rights activist who led Chicago’s chapter of CORE (Congress for Racial Equality. Ron found Mary Houghton looking for something more challenging after a stint at an insurance company and a foundation. She and Milton structured the minority lending program and it took off. Milton turned to his friend, Jim Fletcher, then working for Citizen’s Action Program in the Office of Economic Opportunity during the Johnson presidency. Jim joined in 1969.