February 2022

When Yassin arrived in western Maine in 2008 as a refugee from Djibouti, he knew that he wanted to start his own business one day. In recent decades, Maine has become a destination for a growing population of immigrants like Yassin, who are seeking to build a life for themselves in the U.S. According to Yassin, however, new Mainers often find themselves in difficult living situations due to a shortage of quality affordable housing and other cultural and structural barriers. Therefore, although Yassin was trained as an accountant in Djibouti, his entrepreneurial spirit led him in a different direction.

Photo credit: The Genesis Fund/Flax Studios

To address the renter-rentee issues in his community, Yassin wanted to purchase apartment buildings and rent out units to immigrants who could relate to him. Despite his desire to start his own business, Yassin wasn’t able to go to a traditional lender to apply for a small business loan. That’s because many Muslim borrowers like Yassin are prohibited by their faith practice from paying or receiving interest. As Yassin discovered, most traditional lenders weren’t willing to modify their conventional lending practices or to consider non-interest-based lending models in order to accommodate aspiring Muslim entrepreneurs like him.

Photo credit: The Genesis Fund/Flax Studios

That’s when Yassin connected with Coastal Enterprises Inc. (CEI), a community development financial institution (CDFI) that’s been working in Maine since 1977 to build livelihoods, wealth, and a more equitable and sustainable economy. CEI received a grant to focus on immigrant and new-Mainer entrepreneurs who needed small business start-up funding but who weren’t able to access conventional lending. What the CEI team came up with was a fee-based lending program designed and developed with Maine’s Muslim community in mind.

Fee-based lending works like this: First, these loans are loaned out with a 0% interest rate. Second, the principal of the loan is divided into equal monthly segments depending on the loan terms (e.g. 84 segments for a seven-year business loan). Then, any fees associated with the loan (e.g. costs associated with closing and administering the loan) are calculated and transparently shared with the customer. Depending on the size and terms of the loan, a borrower can either prepay the fees upfront (i.e. pay a $750 fee on a five-year, $10,000 small business loan) or, in the case of larger loans (i.e. a $300,000 commercial real estate loan), the fees can be divided into flat, even monthly allocations that are added to the monthly principal payments.

John Egan and Yassin. Photo credit: The Genesis Fund/Flax Studios

John Egan worked at CEI for 20 years and is now the chief lending and program officer at the Genesis Fund, another Maine CDFI. He adapted the fee-based lending approach to the Genesis Fund’s work, which is centered around affordable housing and community facility finance, including multifamily and commercial mortgage offerings. Through this new loan product, the Genesis Fund has now provided loan capital to Yassin for three properties, which provide rental housing and space for childcare providers serving the immigrant community in Lewiston. According to John, one of the reasons why fee-based loans work is because they’re designed to make sense. “Folks that have a prohibition against paying interest because of their religious convictions do not have the same prohibition about understanding how business works,” he said. “The idea that a fee is attached to the activity of lending money at 0% is not a philosophical or religious conviction challenge, and from what we’ve found, everybody can get behind the concept.”

Photo credit: Soggy Dog Designs

John pointed out that, besides a small distinction in how promissory notes are written and how loans are packaged in the loan software, these fee-based loans “live, breathe, serve, and pay” in CDFIs’ portfolios the same way as interest-based loans. 

John said that when Genesis was crunching the numbers on fee-based loans, he and his colleagues determined that if the loan remains outstanding for seven to ten years, which is typical in Maine, their returns would be about the same as they would with an interest-based loan. “These aren’t a net deficit on our portfolio,” he said. “Instead, we saw that fee-based loans would allow us to actually deploy more capital, further our mission, and reach a group of people that have no access to the mainstream banking system. When we saw that, we were pretty quick to say ‘of course we’re going to do this.’”

‘That’s Part of Our Job as CDFIs’

To date, Genesis Fund has a handful of fee-based loans in its portfolio, and although John and his colleagues hope to increase that number by double digits in the next two years, he’s arguably more enthusiastic about getting local banks to adopt fee-based lending in the near term. According to him, that’s part of the innovative role of CDFIs: to find new ways to fill gaps in the lending market that can in turn be picked up by traditional sources of capital. “That’s part of our job as CDFIs,” John said. “It’s to demonstrate these community projects so that next time, they can be financed by banks, not by us.”

This isn’t the first time that Genesis has led by example in order to get traditional lenders to innovate. For example, Genesis currently has 10 resident-owned manufactured home parks in its portfolio. Although “that’s a drop in the bucket” for a local bank that might have thousands of loans in its portfolio, John says that being able to share data from even a small sample size helps to assuage the concerns of risk managers and risk-averse bankers. By demonstrating the sound economics of deploying loans to manufactured home parks, Genesis helped pave the way for three Maine community banks to participate in financing these resident-owned communities.

Importantly, John isn’t nervous about losing business to local banks; he’s more focused on ensuring that banks understand what CDFIs like Genesis are and aren’t doing, especially regarding fee-based lending. “We’re not a granting agency, and we’re not giving away money like a foundation,” he said. “We’re lending with sound finance principles. We proved the concept and demonstrated how to mitigate the risk, and now it’s time to get banks involved because their volume is so much bigger. We’re confident that we’ll be successful in doing that.”

Meanwhile, John and his colleagues at Genesis are exploring other innovative lending programs in their community, including advocating for a fee-based home mortgage product for immigrant families to buy their first home in Maine. John says that he’s working with state housing officials, local credit unions, and developers to make it happen; however, anecdotally speaking, he said that the first lender to come out with such a product “is going to get run over with applications.” That’s because there is so much demand from immigrants who want to put down roots in Maine. “It’s not a secret,” John said. “When somebody can own property in their neighborhood instead of rent, they have a much louder voice. When you’ve got a higher concentration of owner-occupants in a neighborhood, those people take pride in their properties and reinvest in those properties, and community conditions improve. That’s what Maine needs.”

Photo credit: The Genesis Fund/Flax Studios

In the meantime, small real estate investors like Yassin — entrepreneurs who’ve benefited from fee-based loans from CEI and the Genesis Fund — are stepping up to provide affordable and accessible housing for the immigrants in their community. Today, Yassin owns 12 properties, and he estimates that 90% of his residents are immigrants. According to him, without having the opportunity to simultaneously borrow money and adhere to his Islamic faith, he wouldn’t have been able to pursue his entrepreneurial dreams, including hiring two full-time employees. “Honestly, if that program wasn’t there, then I wouldn’t have my business,” Yassin said. “[Fee-based lending] opened up the life I have today.”