Compassionate Welfare Reform : Training and loans help the poor become successful entrepreneurs rather than recipients of public assistance.

In this era of partisan politics, it is refreshing to see that Los Angeles has a group of women who have developed a concrete and effective welfare reform strategy. The Coalition for Women’s Economic Development strives to get people off the welfare roll by providing technical assistance and small loans so that poor people can start their own businesses.

Although CWED does not discriminate on the basis of race or sex, 83% of the participants are women. Its clients are from Central City, Watts, Echo Park, Pico Union, Inglewood and South Gate--areas with some of the highest poverty rates in Southern California.

How has CWED made inroads into a client base that most commercial banks shun? Most banks view the issues of collateral or poor credit as the greatest stumbling block for low-income entrepreneurs. CWED views the lack of technical knowledge as the biggest barrier to their clients’ success in maintaining small businesses. CWED also recognizes that as long as private financial institutions expect the poor to have assets beyond their wages, small business loans will never be within their reach. That is why CWED focuses on the potential for a successful business, combined with concrete business skill training. All participants in this lending and training program are required to participate in business workshops that focus on management, credit and peer lending.

A significant amount of CWED’s budget, therefore, goes to training and follow-up technical support to its “microbusiness” loan recipients. This strategy of coupling training with lending is a risk management tool; it minimizes the chance of loan defaults and small business failure.

Last year, 82 microbusinesses participated in CWED’s Solidarity Circle program. The idea behind this program evolved from the Grameen bank in Bangladesh, where poor women were given the opportunity to borrow by sharing their risk with others like them and providing mutual support. Similarly, CWED’s program brings together five small business owners, providing them with the requisite technical assistance and training before reviewing their loan applications. The average loan approved last year was $2,294. As no collateral is required for these loans, the group assumes responsibility if any of its members defaults.

The value of CWED to inner city community development has not gone unnoticed by the mayor’s office and major corporate sponsors. Last year, the Los Angeles Community Development Department provided $176,082 to CWED. That was matched by contributions from private foundations such as Irvine, Pacific Telesis, Bank of America, Ms. and First Interstate Bank.

Yet CWED today is at a crossroads, deciding whether to maintain its microbusiness loans or to focus on loans to more established small businesses, which do not require the high level of technical assistance and training from the staff. CWED Executive Director Mari Riddle agrees with those who say that the focus on microbusiness loans, although costly, must not be abandoned even for greater economic security.

CWED and other microloan programs show that the major stumbling block to effective lending to the poor is the lack of technical assistance, not the availability of loan dollars. It would make sense for the Los Angeles Community Development Bank, with its focus on lending in empowerment zones and low-income areas, to partner with established groups such as CWED. They could provide the financial and technical support to offset the high transaction costs of lending to poor people with no collateral--an economically sound and compassionate strategy for welfare reform.