A couple of weeks ago, the New York Times ran a fascinating piece on a new kind of financial institution: the green bank, which offers lower loan rates to finance energy efficiency and sustainability projects of various kinds.  It seems that the new banks are having some trouble staying afloat, partially due to the generally dismal economic times and also because, as with many businesses, start-up costs are high in the first few years of a bank's existence.

The Times quotes Bert Ely, a banking consultant from Virginia, who is skeptical about green banking in general:

"I'm not convinced this is ultimately going to be very profitable," he said, noting that the green banks appeared to have relatively high operating expenses — perhaps, Mr. Ely said, because of the need for specialized expertise among loan officers, among other factors. Also, providing discounted interest rates, while good for borrowers, can detract from a bank’s income, Mr. Ely observed.

The latter point is self-evident, but the first is questionable, or it can be for certain kinds of green projects.  Replacing incandescent lightbulbs for compact flourescent lights, or better yet LED lights, is a sure-fire way to reduce electric usage, and the return on investment is well-known.  More complicated projects, like insulating a basement or an attic, may well raise some detailed questions about the kind of insulation or sealant to use, but the costs can be "rounded up" without too much trouble.  It's a bit more difficult to determine how much energy will be saved due to a given insulation project, but here again, some relatively straightforward tests carried out by a trusted energy auditor can provide good estimates, which can in turn give a good idea for the return on investment.

I think the real issues that are troubling green banks are a little more mundane.  While I've never visited such a bank, my guess is that all of the banks listed in the Times article have faily sophisticated marketing efforts, modern green branch offices, and all the other trappings of a modern green business.  All of that costs money, and in a cutthroat industry like finance, high overhead means either higher loan rates or lower profit margins, or both.  Moreover, like many banks, green banks are probably most interested in relatively large loans, whose interest rates are likely to generate profits necessary to offset the cost of the loan officer's time in processing the loan.  However, a vast number of energy efficiency projects are very small-capital loans - a whole household full of lightbulbs might not amount to more than a few hundred dollars, and an insulation project can easily come in under one thousand dollars.  No bank with a nice branch office will ever bother with a loan that small; there's no way to make a profit on it.

However, some of these low-capital projects are also very, very safe investments, so long as the borrowers are trustworthy and solvent.  The time to recover the costs of a CFL project or an insulation project might be measured in months, and the recovery time for a hot water heater replacement might be only a few years (especially if utility discounts are available).

In other words, this is an ideal space for micro-loans or low-overhead lending operations.  Using a system similar to the Kiva API, it would be possible to build a website to support peer-to-peer micro-lending for low-capital green projects with near-certain positive return.  These loans would probably have some fair amount of risk - all loans have some risk, and in order to keep overhead down, it would probably not be possible to thoroughly vet borrowers.  Then again, the low size of the loans would keep risk down, and reputation systems could further mitigate risk.  Such a system could help finance a high volume of relatively low-capital green projects, which is exactly what we need to fight global warming.