The Poor Always Pay

It’s pretty safe to say that three years ago no one could have predicted that one of the few financial institutions to be opening new branches and expanding lending in America would be a Bangladeshi bank that specialized in loans to people below the poverty line (the vast majority of them women). But that’s just what has happened. Grameen America, the U.S. offshoot of the famous Asian microlending institution founded by Nobel laureate Muhammad Yunus, is now in its third year of operation in America, and even as the major banks, still battered from the financial crisis, are keeping credit tighter than ever, particularly to the small and midsize businesses that need it so desperately, Grameen is expanding. This summer, the little Bangladeshi bank—already operating in New York; Omaha; and Washington, D.C.—will move into its fourth U.S. city, San Francisco, fueled by a series of loans from institutions like Wells Fargo and Capital One that, aside from basking in the glow of good PR, have realized that they are more likely to get their money back by lending to African-American hairdressers in Queens or Latina food-cart operators in D.C. than by chucking money at middle-class whites who have bought more McMansion than they can afford.

Ironically, Yunus himself has characterized Grameen as “sub-sub-subprime.” In this case, it’s not a bad thing. Since its establishment in 1983, Grameen has given out billions to borrowers around the world, mainly women below the poverty line, and has recouped 98 percent of its loans. Admittedly, those loans are tiny—$1,500 on average in the U.S., but much less elsewhere. Interest rates are high (15 percent in the American operation), but they are much less than the poor would pay a black-market lender. According to its proponents, the Grameen model works because of peer pressure. Each borrower is required to attend a weekly meeting with other borrowers, all of whom are responsible for communal payback rates (the group can’t borrow more if individuals don’t pay back). Each borrower must also contribute to a personal savings account to help create a financial cushion while building a business.

It’s a model that is 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 mortgages came in. The Grameen way recalls the Latin meaning of the word credit, which is “to believe in.” Grameen builds community at the same time it builds financial security among its members. “I think the financial crisis will be an opportunity,” said Yunus in a speech to borrowers last year, “to create an entirely new type of financial system.” At the opening of a branch in lower Manhattan this past 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.” Indeed, they may be among the most creditworthy.

Certainly, Grameen plays a much needed role in filling the void. Vast swaths of the developing world have almost no access to credit, but even in mature markets like the U.S., there is a large group of “unbanked” people. In the U.S., the Federal Deposit Insurance Corporation says that nearly 8 percent of the population has no access to credit, and 18 percent has very little. Lending to the small businesspeople who create the majority of jobs remains extremely tight. Yet there has been no financial crisis in microlending—the sector is gaining popularity in dozens of nations around the world, including a surprising number of rich ones (Grameen and other microlenders are active in several European nations, too). “Grameen America has 3,500 borrowers, which is much more than we expected to have at this point, and if the trend continues, we’ll be a self-sustaining business by 2013,” says Grameen American CEO Stephen Vogel. He adds that the bank currently operates on grants and long-term loans from other financial institutions, like Wells Fargo or Capital One, which see supporting Grameen borrowers as a way of building a community of more affluent people who’ll eventually need services higher up the food chain.

Most of those who make it up that ladder via Grameen America will be women (many of them single mothers) and their families. While the bank doesn’t market specifically to women, Vogel says that they simply make up nearly 100 percent of those willing to attend meetings and fulfill savings obligations. They’ll also make up the majority of people moving up the socioeconomic ladder, in the U.S. and abroad.