Coming to America: Bangladeshi-Style Banking
A few weeks ago microfinance pioneer Professor Muhammad Yunus was in Queens, New York. No, he wasn’t soliciting funding or international support for his Bangladesh-based microlending institution. He was cutting the ribbon on the brand new Grameen Bank America building.
Thousands of miles away from the original Grameen Bank, the American version will function much like its Bangladeshi counterpart: loaning to groups of women rather than individuals. Like the women who first participated in Yunus’ innovative banking scheme, American borrowers will convene at one member’s house to collect weekly dues. This type of group-lending model increases accountability, since defaulting on your loan affects your peers' access to credit as well as your own.
The Grameen Bank targets women because they're more reliable borrowers. To date, Grameen America has loaned upwards of $250,000 dollars to more than 100 women who are using their $500 to $3,000 loans to establish or expand businesses ranging from floral arranging to house cleaning.
But Yunus has some skeptics to win over. Many question whether the Grameen model will resonate with Americans. Microfinance expert Saiful Islam says "Bangladeshis, Indians, Latinos will follow it, but I don’t know about others." In 1985, a similar program started by Yunus in rural Arkansas at the request of then-Governor Bill Clinton failed due to mistrust among participants, according to Shorebank's Mary Houghton, who helped advise the microfinance experiment in Arkansas.
It does seem somewhat of a strange fit: banking targeted to empower the poorest of the poor in one of the most prosperous countries in the world?
The United States does have its fair share of people living in poverty, however. Immigrants in particular have a hard time accessing credit and are more likely to use predatory lending agencies that charge steep interest rates. What's more, the Center for Financial Services and Innovation, reports that approximately 40 million American households are considered underbanked.
Also, contrary to public perception, microcredit is not aimed at the poorest of the poor. "It’s actually supposed to help those below a certain poverty line who are looking for self-employment as a route out of poverty," says Raj Desai of the Brookings Institution.
In that case, the U.S.-based bank may run into trouble. Approximately 1 out of every 11 Americans work for themselves, while about 1 in 4 in Bangladesh are self-employed.
Yunus will need time to prove that the American model can be successful. It may be that American women need more than greater financial access to climb out of poverty. But Yunus' large following and wide array of awards — including a Nobel Peace Prize — suggest he has a fighting chance.
Digg
Facebook
Google Buzz
LinkedIn
StumbleUpon
Twitter
Printer-friendly version
Comments
Other side of microlending
When I hear the word microfinance, I think about non-profit organizations helping the poor get back on their feet. Compartamos, a profit-making, very lucrative bank in Mexico that goes by the title: "your specialist in microfinance" seems a little off the mark.
Founded in 1990, Compartamos began as a non-profit microcredit institution but has since transformed into Mexico's most profitable bank. This change from a small non-profit to a big business has been supported by their steep interest rates. On average, customers pay an annual interest rate of almost 90 percent, which includes 15 percent in government tax. Proft-making was not exactly what I thought would be on the agenda for a microlending organization.
It doesn't seem like Muhammad Yunus agrees either. In fact, he objects to even the "mention of Compartamos and microfinance in the same sentence," says BusinessWeek. Critics like Yunus liken Compartamos to loan sharks who use steep interest rates to prey off of the earnings of the working poor.
Compartamos defends itself by saying that high interest rates (and high interest income) offer larger incentives for investors to participate. That way, the organization would not be limited by a donor pool. According to BusinessWeek, the "53% average annual return has energized several lenders and investors who hope to replicate elsewhere around the world the bank's success in generating profits from such a seemingly unlikely source: the working poor." But does a focus on profit detract from poverty reduction?
Personally, I side with Yunus, who argues that "microfinance should be about 'protecting [poor people] from the moneylenders, not creating new ones.'"
Grameen is just one more banker, why should I be impressed?
http://www.google.com/search?q=Microcredit+or+Macrowelfare+The+Myth+of+G...
Update: After 11 months - and
Update: After 11 months - and much doubt about its potential for success - a Queens group that lends money to the poorest New Yorkers has hit the $1 million mark.
Looks like Grameen America will be expanding to Brooklyn and Nebraska — the concept may be increasingly important for entrepreneurial Americans given the current economic climate.
Post new comment