Celebrated Grameen Less Viable in U.S.

In an opinion piece in the Wall Street Journal Weekend Edition, Mohammad Yunus, founder of the Grameen Bank, and this year's Nobel Peace Prize winner, wrote:

Microfinance is one of the biggest success stories of the developing world, and proponents like me believe it could be just as successful in helping the poor in wealthy countries such as the U.S.

But while he outlined the way in which the Grameen Bank has worked in Bangladesh, he gave no indication of how it could be adjusted to become viable in the United States. Did he mean through government-funded programs? Or via not-for-profit organizations? Or even through commercial financial institutions?

There are many microloan programs already in existence in America, run by both commercial and not-for-profit organizations. Only two, however, Project Enterprise in New York City and The PLAN Fund in Dallas, closely follow the Grameen-model, which targets the very poor by offering small loans without requiring collateral. In this model, the only security for the lending organization is peer accountability: borrowers are organized into small groups, and new loans are granted only if all group members are current on their payments. There are no punitive measures for borrowers who default on a loan. Both of these not-for-profit organisations are partnered with the Washington-based Grameen Foundation, which was inspired by the Bank.

But other not-for-profits in the U.S. have found the Grameen model less appropriate.

In a report in The St. Petersburg Times earlier this year, Bill Burus, president and chief executive of the U.S. branch of Accion International, a not for profit microloan institution as old as the commercial Grameen, said:

We’re not a social service agency or a government program. And we’re very serious about payback, repossessing collateral, garnishing wages or taking people to small-claims court.

The report goes on:

Burrus was head of Accion’s parent organization, Accion International in Brazil, for 16 years before coming to the U.S. division. He is convinced some microlending policies used in Third World countries simply won’t work here.

Relying on a network of friends to review loans doesn’t work in a society where many people don’t know their neighbors. And while entrepreneurs in Bangladesh can build a successful business selling a commodity as basic as matches, that’s not the case in the United States, where big retailers rule.

“The biggest difference is the size of the (entrepreneurial) market,’’ Burrus said. “In most developing countries, you’re literally talking about the majority of the population being involved in self-employment. That’s not true here.’’

Entrepreneurs in this country also have more financing options, such as credit cards, finance companies and banks.

“The financial system in our country is more sophisticated and penetrates downward," Burrus said. “In Bangladesh or Brazil, banking operates for only 5 percent or less of the population."

Such different social and financial environments make it difficult to conceive of how the existing Grameen model, which is a commercial model, could be transposed onto the U.S.

Perhaps this is why the microloan interest being expressed by U.S. financial institutions is directed at the very poor people in developing countries rather than those closer to home.

In the same Wall Street Journal, Liam Pleven and Ian McDonald reported that:

Insurance powerhouses like American International Group Inc. and Allianz are pursuing an idea called microinsurance - tiny policies targeting the same market [as the Grameen Bank].

The basic idea is to provide life and disability coverage "for low-income people in emerging markets," and thus ride the back of the microfinance wave, providing loan security in the event that the borrower is disabled or dies. With Grameen alone boasting a customer base of 6.5 million, the global potential could be massive. And certainly more significant than the U.S. market.

Yunus’s Grameen model will have to be adapted before it can be adopted in the States, especially if commercial institutions are going to take any interest in it. In the U.S. then, for the moment at least, the "biggest success story of the developing world" remains confined to the not-for-profit sector.