Micro-credit has undoubtedly been a runaway success in developing countries as a tool of both poverty alleviation and economic development. To date, some 100 million people have been reached by micro-loans, and Muhammad Yunus, the founder of the Grameen Bank in Bangladesh, won the Nobel Peace Prize for his work. In addition, thousands of micro finance institutions (MFIs) have sprung up all over Africa, Asia and Latin America.
Micro-Credit’s Limited Success in the U.S.
Micro-credit has also made its way to the United States, a country that, despite being the world’s wealthiest, still has a poverty rate of over 13% (in 2006 over 39 million Americans were living in poverty.) In fact, one of the earliest U.S.-based micro-credit initiatives was begun in 1985 when Bill Clinton was governor of Arkansas and heard of Mr. Yunus’ work; however, the program, called the Good Faith fund, failed, because “the group lending model never caught on.” Since then, dozens of similar attempts have been made, and while many have been successful, the scale pales in comparison to that of Bangladesh and other developing countries.
To put things in perspective, consider this: the most successful loan fund in the U.S.--Acción USA-- “has lent money to more than 20,000 people since 1991.” But most U.S. loan funds serve between 10 and 50 clients a year. In contrast, in the 20 years Grameen has been operating they have lent more than $4 billion USD to well over 7 million of the poorest of the poor. To put it simply, micro finance in the U.S. has yet to reach the scale of success seen in developing countries.
A Possible Solution?
Throughout the summer I have been working on creating a micro-credit program in Providence, Rhode Island. The more research I did, the more troubled I became by the limited scope of U.S. programs. After all, while it is nice to reach 50 people a year with loans, the goal is to work on an idea and a model that can reach 500,000 people a year, and that can be replicated around the U.S. My group has spoken to projects in Washington, New York, New Haven and elsewhere, yet we have constantly seen the same issue: there is a lack of demand for loans.
All this while I have been looking for a solution to that problem, and I think I may have found it! Last week myself and Alan Harlam, who is advising on the project, were meeting with a member of the community who is deeply involved in immigration issues and who has started a non-profit that assists immigrants in a variety of ways. During the conversation she mentioned that if we were to provide loans for things such as repairs on a car, filing for citizenship and rent, then we would literally be inundated with people looking to take out loans.
At first, we were a little surprised by the suggestion: Grameen was built on the idea that there is an entrepreneur in everyone and all they need is access to affordable capital, so why would we bother giving small loans for something other than the start-up costs of a business? At the same time, however, we knew that one of the issues with doing micro finance in the U.S. is that the start-up costs and the cost of living are high. All of a sudden, a light bulb went off in our heads: how can a poor person in the U.S. think about taking out a loan to start a business if they are behind on their rent payments, in debt, their kids don’t have schoolbooks, or they don’t have money to become a citizen? In other words, from the perspective of a poor person in the U.S., why would they take out a loan to start a business when they need to work two jobs just to pay for all their current expenses?
What we realized was that if we start by giving a small, emergency-type loan to a would-be entrepreneur, then they can use that first loan to, in effect, get back on their feet. Once their life is more stable, either because they are now legal citizens or because they have a roof over their head, they can then start thinking about opening a business. And guess what? We’ll be there, too, to give them their first business loan, and by then we will have established a relationship with them and helped them build credit. The problem is that people in the U.S. aren’t less entrepreneurial, it’s just that in order for them to be entrepreneurial they need to have other needs taken care of first! Our central innovation is that we won’t merely or exclusively be providing loans for businesses development; our loans--starting at $500 and moving up to $5,000--will be used to start home-based businesses, but they will also be used to cover other essential expenses. The key thing to remember is that at present people are getting money to pay for all these things, but they are either doing it through loan sharks or family and friends--at a high opportunity and financial cost to them. Our job will be to make the process simpler, more transparent and more affordable.
Innovating on Social Collateral
Our innovation didn’t stop there, however. We think we have come up with a way of ensuring repayment by using social collateral. Now in Bangladesh the way they create social collateral (which they need since their borrowers don’t have traditional collateral) is by requiring that the borrowers (usually women) form loan circles; if someone in the group defaults on a repayment, no one else can receive a loan until the payment is made. That model has enabled Grameen to enjoy repayment rates that however around 98%--something unheard of in the banking world, and they deal with the poorest people in society. That said, the social lending model has proven cumbersome in the U.S., because people live farther away from one another and find it harder to attend the biweekly group meetings that one if required to attend to receive a loan. What’s more, many groups have found that they were trying to create social ties that simply didn’t exist.
So our thinking is this: let’s make use of the existing groups that are already working with our borrowers on a day-to-day basis. In effect, our community partners will be the face of the loan fund. The borrower’s incentive for repaying the loan is that if they don’t, it will reflect poorly on the community partner, and they don’t want that since the partner provides them with essential services. We need to do more research and conduct some focus groups (which we plan to do in September) to make sure our thinking on this is right, but if we turn out to be correct then we may have found the key to making micro finance take off like wildfire in the U.S.!
Becoming a Community Development Bank
If we end up with a flood of people interested in our loans, and if this project grows and reaches scale quickly, then we can begin to think of this more as a community development bank than as a mere loan fund. What’s really exciting about that is that once we go beyond merely giving micro-loans, we can start to reinvest in the community in innumerable ways. Ideally, the bank will be owned by the borrowers themselves, ensuring that all the benefits accrue to the community.
In the end, if this works we will have found a model that is replicable and revolutionary. It can finance poverty alleviation, economic development, renewable energy, student loans, better schools--there’s no end of what we could do if we grew. The fact of the matter is that the single most important thing to solving any problem--social, environmental or infrastructural--is to come up with an innovative way of financing existing solutions. As a community development bank, that would be our mission!
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