Micro Lending, Major Impact

How the maker of SweetTARTS is combining friendship and capital in one tangy dose

Lilia Pascual is a small business owner in the city of Taguig in the Philippines. Not long ago, she and her family of six lived in a small, crudely-made shanty, which they had to reinforce every time a typhoon passed through to keep it from crumbling. At the time, Pascual was the owner of a “sari-sari store,” a Filipino corner mart. “It was a very small business,” Pascual says, and while it was able to stay afloat, it did little to generate income, leaving the family in perpetual poverty.

Like many other developing-world business owners, Pascual did not have access to the capital she needed to expand her operations. Without any possessions of real value or other form of collateral, these entrepreneurs cannot obtain credit through traditional means. Driven from legitimate lending institutions, some seek out dicier options like street sharks. The interest charged by street sharks is high, and if the loan is not repaid the borrower may face real danger. 

But in 2000, Pascual saw an announcement describing loans for business owners and entrepreneurs from an organization called Mentors International. At a meeting, she learned that she could borrow a small amount of money safely, while also getting support and advice that could help her enterprise grow. She immediately signed up.

Mentors International was created to help people like Lilia by linking microfinance, supportive social networks, and wholesome character education. The group’s average first loan is just $172. When combined with some business training and social support, though, this small influx of capital is enough to help many marginal enterprises grow to the point where the owners are lifted out of poverty.

The candy man

Mentors International is the sweet invention of Sunmark Companies founder Menlo Smith. His father, John Fish Smith, moved the family to Salt Lake City during the Depression to join in a cousin’s business venture. Their company, Everbest, specialized in selling household goods and groceries, including a powdered soft-drink mix they called Frutola. The cousins eventually had a difference in approach to the business and decided to split; John Smith kept the Frutola product while his partner took everything else.

John started selling his powdered mix in small envelope packets for one cent, reasoning that people would rather pay a penny for the smaller product than a nickel for a larger package. Sugar rationing during World War II hindered his ability to maintain his product at a pre-war level, but it also created a new market opportunity. The largest confectioners in the country had stopped selling penny candies, designating their allotments of sugar to their higher-margin products. Smith’s packet became the lone sugary product children could purchase for a single cent.

Then Smith noticed that kids sometimes slurped up the powder directly rather than mixing it into a drink. The product grew in popularity after the war, and Smith realized there was potential to take it national, but at his age that was not a venture he wanted to tackle. His son Menlo stepped in.

After some initial research, Menlo determined that St. Louis, Missouri—which used to be the center of the American confectionery industry—was the best location to manufacture and sell the product on a continental scale. He first created Pixy Stix to make his tangy powder less messy to consume. Then, gaining access to an underused machine for making antacid tablets, he discovered that his fruity flavorings could be compressed into little colored disks. SweeTARTS became part of Americana, and Smith soon added other products like David’s Sunflower Seeds and the Willy Wonka Candy Company to his booming enterprise.

Menlo Smith is a member of the Church of Jesus Christ of Latter-day Saints, which puts serious leadership and missions expectations on its congregants, no matter how busy their lives might be. In the 1980s he was called to serve a stint as president of the Mormons’ Baguio Mission in the Philippines. There he saw firsthand true hunger, homelessness, and hopelessness.

“I had been in developing countries before my mission, and I had seen poverty before,” says Smith, “but I had never seen this depth of poverty. I wasn’t a visitor; I was living in the country.” Upon completion of his mission term, Smith was determined to help break the cycle of poverty in countries like the Philippines. But he wanted to help in a way that empowered people to direct their own lives and not become dependent. “It’s very important that you don’t let the people you try to help become tragedies of your compassion, which is very easy to do,” he says.

On the advice of leaders in the LDS Church, Smith reached out to the Marriott School of Management at Brigham Young University to find help for his cause. He eventually connected with professor Warner Woodworth and Utah businessman Steven Mann. They organized a team of graduate students to visit Manila to gather input and develop ideas. Smith and Mann each put up $5,000 to finance the launch.

After the initial research, a meeting of interested parties took place in Manila in 1989. Before deciding to undertake any long-term operation, the group agreed that a three-year, $400,000 pilot project would be necessary to either prove or disprove their model. The LDS Church, with its growing membership around the world, particularly in developing nations, showed strong interest in the effort. Smith’s group approached the church with an offer to raise the first $200,000 if the church could match it.

“We told the church that we would not come back to them for more money after their $200,000 contribution,” Smith recalls. “If this was going to be successful, we would have to be able to make it on our own.”

Peer-pressure payments

Today, microfinance is a household term, thanks to the work of Nobel Prize winner Mohammed Yunus and popular organizations like Kiva. Mentors International was an early adopter of the microfinance model—and while many of the goals and logistics are the same, it came to have its own distinctive flair.

People seeking loans from Mentors International must meet certain qualifications. First, the applicant must obtain a personal recommendation from a respected member of the community, often a minister or other religious leader. Then a borrower must form a solidarity group—five or six individuals who are each interested in securing a business loan and willing to work together, supporting each other to make sure everyone succeeds. Lastly, the applicant agrees to attend training classes to learn practical skills like budgeting.


A loan of just a few hundred dollars made all the difference to this Guatemalan weaver. (Mentors International)

The program is very decentralized. Both the classes and loans are administered by Mentors International’s subsidiaries, which are directed by local business people and leaders. The whole emphasis is on running the program through people who share connections, physical locations, and friendships. Financial accountability is built on the level of intimacy among the people doing business.

The program particularly seeks borrowers with what it calls the three M’s: mentality, morality, and motivation. Loan recipients must demonstrate the mentality to learn and understand the principles of running a business. They must also have the morality to make and keep promises, to honor business relationships, to avoid cheating customers. Finally, they must have the motivation to dedicate themselves to the success and growth of their enterprises.

While the whole group is taking business and life skills classes, the borrower who organized the solidarity group will usually be the first person to receive a loan. She (90 percent of Mentors International’s clients are women) will make weekly repayments with interest. If the first recipient is able to make payments and keep her business operational, then another person in the group gets a loan. If the second person meets the same standards, a third person gets a loan, and the process is repeated until everyone has received funding. Every member makes a commitment that if anybody’s business starts to have difficulties, or if someone gets behind on the loan payments, the others will either try to help solve the business problem or make good on the person’s loan.

“It’s sort of like having a built-in board of directors on a very small scale,” Smith explains. “While these loans never involve collateral, collateral is naturally developed in the form of social pressure and self-interest to not get behind on your loan.” If any person in the group fails to make his or her payments, lending for all members in the group stops. The social collateral, as Smith puts it, is the ultimate motivator for success.

Mentors International ensures that its local administrative partners operate by the same principles required of borrowers. Each local chapter must pay its own overhead via the interest collected on its loans. “If we were going to teach the people to be self-reliant and self-sufficient, then our partners should also be self-reliant and self-sufficient,” reasons Smith.

For its part, the headquarters organization has honored its original arrangement with the LDS Church: all subsequent funding has been raised from private donors. Meanwhile, the church has initiated some microfinance projects of its own through “self-reliance centers” around the world.

At Mentors International, a website with client histories gives donors large and small a glimpse into the lives of the entrepreneurs their gifts support. In 2014, the organization expanded its pool of rotating capital with more than $1 million in contributions. It distributed over $5 million in loans during the year. When a loan is repaid, that money is recycled to another borrower. So each dollar contributed touches multiple low-income strivers, and the program is always growing.

The repayment rate across all Mentors International loans is 96 percent. Over 98 percent of the women in Peru who received one of its loans, notes one of the nonprofit’s reports, have overcome the country’s poverty index. In Honduras, the average borrower who makes it to a third loan cycle has been able to at least double her income. In just the Philippines, Mentors International has helped 11,000 families shift to three meals a day since 1999.

“The loans helped my business get very big. They have helped my family,” says Lilia Pascual. Fifteen years into the program, she is the owner of a thriving lumber, hardware, and general merchandise business. She has sent all four of her kids to college, and those who have graduated are now working professionals. Her family no longer has to worry about typhoons destroying their shanty—they own a spacious concrete home on a lot that includes several rental units which Pascual also owns.

Thanks to mentoring and training, successful clients like Lilia also have much richer social networks and better skills for navigating all aspects of daily existence. “Our real focus,” says Smith, “has always been on helping develop the character necessary to be successful in business and successful in life.”

Marques Chavez is director of communications at The Philanthropy Roundtable.


Direct Donations

If you visit the website of Mentors International you will meet the entrepreneurs aided by gifts to the program—a strawberry farmer, a rope-maker, a blind restaurateur. However, your donation will go into a common fund, and the actual lending decision will be made at a local level.

But in this special issue of Philanthropy exploring new mechanisms and forms of giving, it’s worth noting that there are other versions of microfinance that connect lenders and borrowers directly. Kiva is an example. Its loans start at $25 and go toward basic investments like a dairy cow or rickshaw. Repayment schedules are clear and provided online as well, and users can post ratings of risk and repayment reliability. Virtually all Kiva loans are repaid in full, and lenders have the option to invest their repayment in another loan. Like Mentors International, its recipients are not grantees, but business partners.

When Matt Flannery and his wife, Jessica, first imagined Kiva in 2004, there wasn’t a precedent for individual sponsorship of a business overseas, and certainly not over the Web. Their concept for allowing Internet users to make microloans to particular entrepreneurs in developing countries flustered regulators at the U.S. Securities and Exchange Commission. Some funders also fussed over distinctions between charity and for-profit. The Flannerys explored taking Kiva commercial, but the board felt strongly about remaining nonprofit.

Today, Kiva is a proven operation. Since its founding it has connected over one million lenders and borrowers worldwide, making $680 million in microfinance loans. In 2013, the group launched a domestic branch, partnering with microfinance institutions in Little Rock, Arkansas, and Washington, D.C., to support American small businesses.

Another organization encouraging direct person-to-person giving in the U.S. is DonorsChoose. Its mission is to make it easy for individuals to support projects in K-12 education. In 2000, Bronx teacher Charles Best created a website where he and his colleagues could post requests for classroom aids, taking contributions as small as $5. If a particular project reaches its goal, the teacher receives his or her request. If the project doesn’t reach full funding, donors can choose to send their teacher a gift card or invest in another project on the site. Since its inception DonorsChoose has connected over 1.5 million donors with over 200,000 teachers, giving away $308 million.

A similar platform, Kickstarter, has a foot in both the philanthropic and for-profit worlds. Unlike Donors Choose, Kickstarter funding can go to any purpose—educational, artistic, technology invention, new business formation, you name it. The purpose can be commercial, charitable, or personal. Individuals can give (without a tax deduction) to any effort they deem worthwhile. Similar to DonorsChoose, funds do not change hands if a project fails to receive enough pledges to meet its goal. Kickstarter collects a 5 percent fee on any fully funded project.

While Kickstarter is not a charity, in some areas, especially the arts, it has encouraged much creativity and innovation. By 2013, Kickstarter was distributing several times as much annual funding to artists as the National Endowment for the Arts. Since 2009, over $2 billion has been pledged by 7.8 million people, funding more than 77,000 projects.

What this means for traditional philanthropy is yet to be seen. Meanwhile, donors like Catholic-school supporter John Hazeltine are trying to see if direct donating can be taken to an even more intimate level. Some years ago, he was moved to pay the Catholic-school tuition of one of his children’s schoolmates after that boy lost his father to a heart attack. The experience taught Hazeltine that having a direct connection to a recipient can be powerfully satisfying. Upon prodding from a pastor, he sought out other children in his community for scholarships based on specific knowledge of their needs.

Today Hazeltine is working on a platform where donors can read personal narratives and contribute to individual students’ schooling. While he admires traditional tuition-aid programs like the Children’s Scholarship Fund that pool funds and deliver them corporately, he believes that many givers will dig deeper if they know the real-life stories of children they’re helping. Hazeltine acknowledges that this approach has its share of ethical and practical issues to navigate, including privacy and fairness concerns, but he thinks those can be solved.

One organization with 60 years of experience in trying to balance the pros and cons of direct giving is World Vision. Its child sponsorship program connects donors to specific kids with whom they exchange photos and letters. While those relationships are direct and one-to-one, financial contributions go into a pool that World Vision distributes across that child’s whole community. This method helps avoid turning charity into a popularity contest and allows for larger, longer-term projects, while keeping a personal element and direct human connection alive.

With the help of technology, it is possible today for a single modest donor to send a child to school, grow a business, or help a jazz trio perform at a festival. Little gifts can have big consequences. And new levels of generosity, respect, and mutual satisfaction can sometimes erupt when givers and recipients connect directly.   —Ashley May 

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