A Bank From Bangladesh Brings Microlending to U.S.

A borrower of Grameen America Courtesy of Grameen America

Laura Falcon, an Ecuadoran immigrant working as a babysitter in New York, became an entrepreneur by accident. About a year ago, when her uncle back in Ecuador was having hip problems, Falcon sent him some vitamins that seemed to help. She began to think there could be a broader market for the products, which are not widely available in her home country. But she needed a loan to buy them in bulk, and as a person with no credit history she couldn't get one from any local bank.

An agent at a local immigration center pointed her to Grameen America, the U.S. offshoot of the Bangladeshi micro-lending operation. If she put together a group of five entrepreneurial friends and relatives, Grameen officials told her, they could each take a $1,500 loan, to be paid back in weekly $30 installments (plus $3 in interest). If one person in the group defaulted, all would be responsible. Falcon quickly organized a cadre of women who now run businesses, including an ice-cream stand, a cupcake-catering operation, and a fruit stall. Every Monday at 7 a.m. sharp, they meet in a brownstone in Brooklyn to make their payment to a Grameen center manager, and talk about the challenges of running their businesses. Then it's off to their regular day jobs. Falcon herself is now doing a brisk export business and is well on her way to saving the $4,000 she needs to renovate part of her home and open a child-care center.

Three years ago, no one could have predicted that one of the few financial institutions to be expanding in America would be a Bangladeshi bank specializing in tiny loans to people below the poverty line (most of them women). But microcredit has become a bright spot in the global financial system, with governments and the private sector looking to it as a way to create prosperity in the most vulnerable populations. Micro-lending has been popular in the developing world for decades, but is gaining steam in rich countries now too. Grameen, founded by Muhammad Yunus, who won the 2006 Nobel Peace Prize, has operated in the U.S. since 2007. It has branches in New York and Omaha, and is expanding to San Francisco. It joins other microlenders like the Latin American Acción, which offers larger loans to more affluent borrowers.

For some aspiring entrepreneurs, Grameen's growth hasn't come fast enough. Two years after the near collapse of the U.S. banking system, credit to the small businesspeople who create the majority of the country's jobs is tighter than ever, and for those at the bottom of the pyramid, loans are almost nonexistent. The Federal Deposit Insurance Corporation says that nearly 8 percent of the U.S. population has no access to credit, and 18 percent has very little. This is the population that Grameen aims to serve, fueled by loans from institutions like Wells Fargo and Capital One that, in addition to basking in the glow of good PR, have realized they are more likely to get their money back from African-American hairdressers or Latina food-cart operators than middle-class whites with maxed-out credit cards. The payback rate among Grameen borrowers is 98 percent, compared with the U.S. commercial-banking average of about 90 percent.

Since its establishment in 1983, Grameen has given out billions to borrowers around the world, mainly women below the poverty line. Most loans are tiny—$1,500 on average in the U.S., and much less elsewhere. Interest rates are high (up to 15 percent in the American operation), but far less than a black-market lender would charge. According to proponents, the Grameen model works because of peer pressure (the group can't borrow more if individuals don't pay back). Each borrower must also contribute a minimum of $2 per week to a personal savings account to help create a financial cushion as they're starting their businesses. "We want to motivate these people to save money and meet their future challenges," says Shah Newaz, senior vice president and general manager of Grameen America.

It's the antithesis of the big-bank system of recent years, in which the "know your customer" approach of the local savings and loans went out of fashion and the complex bundling of thousands of subprime mortgages came in. The Grameen way recalls the Latin meaning of the word "credit," which is "to believe in." At the opening of a branch in lower Manhattan in May, Yunus pointed out that "Wall Street does banking to the world, but it doesn't do banking for its neighbors. We are here to show there's nothing wrong with banking with neighbors."

That's not to say that there aren't challenges with this type of lending. It's difficult to find hard numbers showing the extent to which microfinance has helped borrowers permanently climb the socio-economic ladder. Although Grameen's figures from Bangladesh show that the bank has helped some 68 percent of borrowers there emerge from poverty, officials say it's too early to track those numbers in the U.S. It's also premature to say whether Grameen America will follow its Asian counterpart to profitability; the loans are tiny and this type of lending is labor-intensive, making the work less profitable than traditional banking, especially in the West, where costs are higher. Still, Grameen America CEO Stephen Vogel remains hopeful. "We have 3,500 borrowers, which is much more than we expected to have at this point, and if the trend continues, we believe we'll be a self-sustaining business by 2013." He adds that the bank currently operates on grants and long-term loans from other financial institutions, like Wells Fargo and Capital One, which see supporting Grameen borrowers as a way of building a community of more affluent people who'll eventually need more banking services.

Most of those who make it up that ladder via Grameen America are recent immigrants and ethnic minorities (Grameen does not ask about immigration status), including many single mothers. Although the bank doesn't market specifically to women, Vogel says they make up nearly 100 percent of those willing to attend meetings and fulfill savings obligations. "We haven't had any problems with anyone missing their payments or not fulfilling their obligations yet," says Grameen borrower and health-products entrepreneur Elsa Zhunio, a member of Falcon's group. "If that happened, we'd help them make the payment if they needed it. Grameen is helping us, and if one person messes up, it would be an embarrassment to us all." In the Grameen model of lending, it takes a village to raise capital.

With Jessica Ramirez In New York