If this microfinance venture by Grameen Bank is as successful as I hope it will be, it will be an indictment of US banks who provide only very high priced products to the lower income and poor, and then justify it by claiming that they offer a useful service. They of course prey on the prejudice that the poor by definition are bad risks, and compensate by putting high credit spreads into their products.
Another approach would be to screen potential clients much more thoroughly, and find borrowers who looked capable of meeting their obligations. Doug Smith in Slate informed us that not-for-profit mortgage lenders had defaults comparable to prime borrowers in their subprime portfolios due to careful screening and borrower education. But that takes more work and is less lucrative. Competition will show whether the conventional view is correct or merely self-serving.
From the Financial Times:
Bangladesh’s Grameen Bank has made its first loans in New York in an attempt to bring its pioneering microfinance techniques to the tens of millions of people in the world’s richest country who have no bank account.
The bank’s entry into the US, its first in a developed market, comes as mainstream banks’ credibility has been hit by the mortgage meltdown and many people are turning to fringe financial institutions offering loans at exorbitant interest rates.
“Now is a good time because of . . . the subprime crisis and that highlights the issue that the financial system is not perfect,” Muhammad Yunus, the bank’s Nobel Prize-winning founder, told the Financial Times.
Grameen has lent $50,000 in the past month to groups of immigrant women in Jackson Heights in New York’s borough of Queens. During the next five years, it plans to offer $176m in loans within New York city, and then expand to the rest of the US.
In Bangladesh, Grameen lends to poor women seeking to start small enterprises who cannot borrow from banks because they do not have accounts or a high enough credit rating. The bank, which started with $27 in loans Mr Yunus made to 42 women in Bangladesh in 1976, has now made more than $6.5bn in loans to 7m people in the country.
In the US, about 28m people have no bank accounts and 44.7m have only limited access to financial institutions. People often do not hold bank accounts because they have had credit problems, have no access to a local branch or they distrust the mainstream financial system, said Jonathan Morduch, a microfinance expert at New York University.
Some microfinance experts doubt that Grameen could make an impact in the US where credit is widely available, and businesses and tax systems are much trickier to navigate than in developing countries.
After beginning with small loans to micro-entrepreneurs, Grameen plans to expand into other businesses such as remittances and mortgages.
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Is Gramen Bank a ‘women only’ financier? The journalist would have us believe that. But I suspect Gramen merely gives women a fair shake and accidentally does a brisk business with women.
Gramen’s success must be linked to risk control. Interesting
The poor take smaller loans than the middle class, but the cost of servicing those loans is hardly any less, and in many case is actually higher. Since this overhead cost is a larger percentage of the loan amount, the only way to break even is by charging higher interest rates or fees. And in the case of microfinance and the “unbanked”, the servicing costs are likely fairly high because there’s quite a bit of basic financial education and handholding required. Lending money to people who don’t know what they’re getting into can be a very costly mistake for everyone involved (just think of the recent subprime debacle, for example).
It’s an interesting experiment (or perhaps, agenda), but it’s hard to see how they can make it work unless they charge the high rates of interest typical of microfinance in other parts of the world.
In any case, the greatest need and greatest opportunity for positive impact is is still in the developing world. For one thing, a dollar goes much, much further there. For another, poverty in the developing world is more likely to be primarily due to lack of opportunity rather than other factors such as personality or character, and therefore is more readily remediable by access to credit. By contrast, in a developed country where there is considerable opportunity already, a certain number of the poor would not benefit from being extended credit. Consider the astonishing percentage of lottery winners who end up flat broke a few years after their big win.
PS,
The Bangladeshi organization BRAC is doing very interesting microfinance work in eastern Africa, in some of the most unlikely places (southern Sudan, for instance). One way for individuals to participate in a small way in this and other microfinance opportunities in various parts of the world is Kiva.org (which has been endorsed by Oprah and former president Clinton, and has received extensive press coverage).
When I was younger I dreamed of making a ple and moving to a third world country with a warmer climate.NOW I DON’T HAVE TO MOVE!
mikeinoregon: While Grameen Bank is not “female finance only,” they have intentionally targeted women-owned start-up businesses in the developing world.
They learned that (at least in the developing world): (1) women were more open to seeking micro-loans than were their husbands, and (2) the money women earned in their micro-enterprise tended to get spent actually improving the standard of living of the children/family, rather than on non-family expenses.
Certainly part of Grameen’s success is educating borrowers, but one of the risk control factors that I think gets overlooked in comments is the concept of a peer review group of fellow borrowers. I don’t know if they use this universally in all their markets, but as I recall borrowers are part of a group who can share experiences and who also hold each other accountable for loan payback. So, there’s a certain amount of peer pressure to “do the right thing.”
Also, if I recall correctly, one of the reasons Grameen has been able to pull this off is bank employees expect to work hard for relatively nominal compensation. So while the administration of these loans would appear more time intensive, perhaps overall costs are less of a drag on earnings up and down the economic food chain. It will be very interesting to see how this flies in the US, where are expectations are probably quite different.
An excellent book for learning more about Grameen Bank is “Banker to the Poor: Micro-Lending and the Battle Against World Poverty” by Dr. Muhammad Yunus.