Among my numerous ongoing projects (which include my masters thesis and starting a company) I’m also working with several Brown students to create a student-run micro-credit program in Providence, Rhode Island. Initially, I had the idea to do something like this around 5 months ago when I read Muhammad Yunus’ autobiography Banker to the Poor. Muhammad Yunus won the Nobel Peace Prize in 2006 for founding the Grameen Bank in Bangladesh 30 years ago, and bringing micro-credit to the fore as a means of addressing poverty. After I read his book, I began researching the possibility of starting a similar initiative locally.
Micro-Credit Serves a Need
Basically, the idea behind micro-credit is that the world’s poorest individuals are often, by necessity, also the world’s most entrepreneurial people. In order to survive they have to find creative ways to create and sell goods or services. What they lack, then, is not energy or ideas, but rather access to capital. As a result, they are forced to rely on loan sharks who charge them exorbitant interest rates, keeping them in perpetual poverty no matter how successful their business is. And of course traditional banks don’t bother providing loans to the poor, both because they view them as an unacceptable credit risk and because the transaction costs of dealing with loans as small as $10 USD are too high for them.
This is where micro-credit steps in. First, the poor are able to receive loans without any access to collateral; they pay an interest rate that is fair; and they receive the tiny loans that they need in order to jump start their business. In the case of Grameen Bank, Mr. Yunus’ innovation was using lending circles to ensure a high re-payment rate (which is consistently above 98%). In a lending circle, a group of people undergo business training together and gain trust in one another. Two people at a time can receive loans, and the other people in the group can only receive a loan once the first people pay back their loan, thereby creating peer pressure not to default.
Learning about Micro-Credit
Anyway, I found out a lot about micro-credit, and also learned that there are several U.S.-based initiatives, but I got stuck when it came time to start making contacts in the community and speaking to potential borrowers. Additionally, I realized that I didn’t know enough about how loans work (i.e., I didn’t understand the difference between simple interest and compound interest, and how to calculate them, etc.). Then, by chance, while attending a lecture on micro-credit in Providence I ran into Alan Harlam, the director of Social Entrepreneurship at Brown, whom I had met previously and who informed me that he was looking to start a micro-credit program in Providence. I immediately told him that I wanted to be involved
Several weeks later I met with him and two other Brown students, Hannah and Mollie, that also expressed an interest. Within a few days of that meeting we began contacting all sorts of groups and individuals–other micro-credit groups, people who know a lot about micro-credit, Brown students that did their theses on the topic, etc. For the last month we’ve been actively researching what’s currently being done, and we have gleaned a lot of fantastic information. For instance, we discovered that many U.S. based program find that the group lending circle just doesn’t work because the social ties here are different than in, say, Bangladesh. We’ve also learned that doing micro-credit in the U.S. is really hard, because even the poorest of the poor need loans starting at around $250-$500 to be useful to them, whereas a $10 loan in Bangladesh is more than sufficient.
One of the ways that we are going to deal with these difficulties is to rely on free Brown student labor to do much of the work in the program: disbursing loans, designing the program, meeting with borrowers, etc. We are of course still figuring out how we are going to structure everything, but by chance myself and Mollie will both be taking a course on Social Entrepreneurship next semester, during which our semester-long project will be to create a business plan for the initiative. Brown has put up $5,000 in seed money, and we plan on giving out our first loans in January.
The goal is to address poverty in Providence by providing access to credit and business advice to lower-income residents. It should be noted that Providence has the third-highest poverty rate in the country at around 25%. With a high immigrant population and a tough economic situation in general, there is a strong need for community-based projects that can inject some capital and economic growth into some of Providence’s poorer neighborhoods.
Yesterday we had a fantastic meeting with a non-profit in Olneyville, a neighborhood of Providence. The name of the non-profit is English for Action (EFA), and they teach English to recent immigrants to Providence. It turns out that many of their students often express a desire to start their own enterprises, but don’t know how to go about doing so. At the same time, the teachers at EFA develop a very strong bond with their students, which is important because we need the borrowers to trust us if they are going to take loans from us. The bottom line is that we have found our first potential community partner, and we still have a ton of other leads and contacts to speak to. Though we are still in the early stages, things are progressing nicely.
One last point is that it has always been a dream of mine to be this involved in a community, to be heading out to meetings that have the potential to start things that will really improve the lives of others. It’s an opportunity to use my creativity, passion and energy to design and implement an innovative, meaningful, important program. I couldn’t be happier or more excited!