Charitable Loans in Times of Economic Turbulence

     If the purpose of philanthropy is to enrich the lives of the less fortunate, it does not follow that one must give his/her money away. Rather, one can loan his/her money to a “program related investment” which will utilize the donation and then return it with interest, thus allowing the donor the option to perpetually reinvest the principal and interest. This philanthropic method has been employed for years but only touted when economic instability sweeps through the financial markets, and donors become concerned with their ability to continue to fund their philanthropic projects.

     For example, one foundation purchased a commercial building to house several nonprofit organizations. The nonprofit tenants pay a reduced rent and the rents are used by the foundation for grants and other nonprofits. Today there is increasing opportunity to invest in microfinance, community development and donor advised funds as discussed below.

Microfinance 101

     Micro-lending is the making of small loans to enable entrepreneurs to fund their budding businesses and, thus alleviate global poverty. While some microfinance Web sites specialize in lending to persons in developing countries such as Kiva.org or MicroPlace.com, which is owned by e-Bay, safer domestic lending opportunities exist. The best known domestic micro-lenders in the U.S. are community development banks (“CDB”) which lend monies to low-income individuals, businesses, nonprofits, environmental and faith-based groups. In a CDB you open an account and make a deposit, which is insured by the Federal Depository Insurance Corporation aka the FDIC. The list of CDBs is large and includes Bank of America, Carver Federal Savings Bank in New York City, and City First Bank of D.C. in Washington, D.C. A CDB has either a state or national bank charter. If national, it is regulated by the Office of the Controller of the Currency and is required to lend, invest and provide services primarily to low-to-moderate income individuals or communities.

Donor-Advised Funds and Microfinance

     In an effort to cash in on philanthropy, mutual fund companies have established donor-advised funds. These funds allow individuals to make contributions of cash and other assets to a third party charitable fund that invests in equities and bonds. Donors receive a tax deduction and are permitted to recommend charities that will receive grants from the fund.

     Only a few donor-advised funds permit their contributors the option to make microfinance loans with a portion of their donations. The fund families that offer donors the option to make microfinance loans include the Charles Schwab Corporation and the Calvert Foundation.

Family Foundations and Microfinance

     While the number of family foundations involved in microfinance is unknown, it is an excellent way for a foundation to ensure its continued viability. When the financial markets get roiled, foundations are understandably reluctant to give principal away. By making a loan to a “program related investment,” the loan amount is counted against the minimum five percent (5%) of assets the foundation is required by U.S. tax law to pay out every year. As the loan will be repaid with interest, the foundation’s principal is renewed and, presumably, larger amounts donated in the future as the foundation recovers from the market turmoil.