If it’s November, then I must be teaching microfinance.
For the last several years, as fall starts giving way to winter, I start to wind down my teaching about social enterprise and “wind up” my teaching of microfinance.
The past week, my class focused on microfinance in the United States. Microfinance is a considerably more developed activity overseas than here.
In the the estimates that about $320 billion flows through alternative financial services every year, likely more. This band of payday lenders, pawnshops, check cashing services and other providers offer financial services helps the poor participate in the financial system, but at far too high a cost. (Example: pawning may have interests up to 300% payday loans may carry an of 400%.) All told, 10 percent of all Americans may be unbanked, and 40 million households may be under-banked. $8 billion of too-high fees are collected from the poor so that they can conduct their financial lives.
If there is so much money to be made, shouldn’t others — others with more respectable motives — be entering the game? Yes, and they are: New not-quite-banks like Kiva.org and Wal-Mart are starting to cater to the US poor’s financial needs. And so is Grameen America.
I saw the film “To Catch a Dollar” when it played in theaters briefly last spring. What follows is what I wrote then. I remain hopeful that Grameen can serve the poor of the United States, just as they do in Bangladesh.
I just returned from watching the film “To Catch a Dollar: Muhammad Yunus Banks on America.” Yunus founded Grameen Bank in Bangladesh, which disburses $1 billion in loans annually to poor women in the developing world, without ever asking for collateral, and achieves a repayment rate of nearly 100%.
Grameen America, launched in 2008, is not a bank but it makes loans ranging in size from $500 to $3,000 to women living in poverty in the United States. Whereas a bank can take deposits from its customers to lend out to others, Grameen America relies on contributions and long-term loans for its source of funds.
The movie tells the story of several extremely hard-working women in Queens, New York, who need to “catch a dollar.” This is the phrase Yunus uses to explain the plight of the poor who seem trapped in a cycle of poverty.
Either they can’t find a job. Or their wages, minus their expenses for childcare, carfare, and all the other, unrelenting financial requirements that still accompany a low wage job, are entirely consumed by rent and food — if they even cover that. Or they get locked into a permanent cycle of indebtedness: They get a loan at an incredibly high interest rate, can only afford to pay the monthly interest, and thus their loan balances never drop by even a penny: a loan shark’s dream — a paying customer for life.
If they could “catch a dollar” — meaning they could obtain money that they could use in productive ways — they could use it to build their lives. This is where Grameen America helps a baker buy a power mixer; a cook obtain financing to open her own restaurant; a hair stylist to buy her own “chair” in a salon so that she is now running her own business (and selling shoes on the side).
Grameen America, like Grameen Bank, turns the idea of lending upside down. Yunus explains: The more money you have, the easier it is to get a loan. Banking should give priority to those who have the least money, or none at all. Grameen America is reaching out to the 40 million un-(der)banked Americans so they can “catch a dollar” to better their lives.
When people told Yunus that his ideas about making small loans to the poor in Bangladesh were foolish, he simply shrugged and made them anyway. When they said that the same ideas that worked in the developing world couldn’t work in the United States, he shrugged again.
Grameen America is founded on the same principles that Grameen Bank used to start Grameen in Bangladesh, the core of which is the “self help group.” Five women band together into self-selected groups. In this group setting, each member applies for a loan (which must be used to start or expand a business), receives money from Grameen America, makes weekly payments on her outstanding balance, and shows receipts and other documentation demonstrating how her business is doing.
All business plans must be approved by the group, and if any member fails to make her required weekly payment, the whole group suffers because Grameen America will refuse to make any other woman in the group another loan, no matter how successful her business or her repayment history. This creates powerful social pressure to repay, even in the absence of any kind of collateral. The group also serves as a source of encouragement and helps members support each other’s efforts.
Grameen America insists on the same financial discipline required by Grameen Bank in Bangladesh. Customers must first take five classes in financial literacy and open a savings account before they receive a loan. Typically, 2% of the initial loan principle is paid back each week, ensuring a declining balance and repayment of the loan within a year. Borrowers also pay interest (at an annual rate of 7.5%) and make small savings deposits every week.
Vidar Jorgensen, President of Grameen America, and Premal Shah, President of Kiva.org, explained in the panel that accompanied the video: The poor are disadvantaged by the financial system in so many ways. If they’re on welfare, they can’t receive a bank loan. And even if that weren’t a restriction, they have no credit history and have scores so low that no bank would make them a loan. With slightly higher scores, they may become eligible, but they will receive the worst interest rates the bank offers. On top of all this, low scores create a serious impediment to renting a place to live and getting a job. Being poor keeps you poor.
Which, again, is why Grameen America hopes to let its clients catch a dollar. By making business loans and providing business support, it increases its clients’ incomes. By insisting on savings and consistent, on-time repayment of loans, it helps clients establish respectable credit histories. Favorable credit histories can lead to larger loans (possibly by banks), better opportunities to rent, and possibly the opportunity to get a job that one would otherwise have never been considered for.
Grameen America uses a “bottom up” approach that relies on empowering individuals to enable them to lift themselves, and their fellow group members, out of poverty. It is now hoping that individuals take up the mantle of leadership and support for its efforts. Tell others what Grameen America is doing.
Grameen America currently operates in Queens (New York), Brooklyn, Manhattan, Omaha, Indianapolis and, most recently, the Bronx.