Saturday, October 1, 2011

Grameen Bank Comes to the USA—It Goes Where the Poor Are

There was an interesting article in The Economist describing the lack of traditional banking services available to the poor. The claim was made that one in four US households either have no banking means or they combine traditional banks with other financial service providers. Alternatives to banks are generally much more expensive, hitting hard those who can least afford the cost.
"Small wonder that non-bank services are booming. Each year Americans buy $75 billion in money orders from outlets other than banks or post offices, and cheque-cashers convert some $60 billion. Revenues from pre-paid cards, remittances, money orders, cheque cashing and payday lending were $338 billion in 2010 and may well rise to $520 billion by 2015. Big-box retailers are getting in on the act, too: K-Mart, Best Buy and Walmart all offer bill-paying stations to their unbanked customers. Walmart also offers reloadable pre-paid credit cards and cheque-cashing, which costs $3 for a cheque up to $1,000 and $6 for cheques between $1,000 and $5,000."

There seems to be quite a bit of money in play here, but the traditional banks don’t seem particularly interested in capturing a large number of small accounts. It is rather easy to turn people away with minimum balance requirements and the various fees that are often waved for wealthier customers.

What was of particular interest in the article was to discover that the Grameen Bank began setting up business in the US in 2008 under the name Grameen America. Grameen was initially set up in Bangladesh to bring banking to those who were ineligible for loans and services from established sources. The beauty of the system Grameen founded was the way that was established to provide collateral for loans to people who had no physical assets. It accomplished this by establishing social collateral. Each person who applied for a loan had to team with a number of others desiring loans. One person received a loan with the understanding that the others would not receive theirs if the first one defaulted. This creates peer pressure on the first to perform well, and provides a network for support if problems arise. The system worked amazingly well and provided the originator of the concept, Muhammad Yunus with the 2006 Nobel Peace Prize. One would have thought that it deserved the economics prize as well. It is hard to recall any concept as useful as this coming out of academic studies in the field.

The article starts with the tale of a person named Sabina in Queens who sold flowers from a street cart. With a Grameen loan of $1500 she has now moved into a store front and appears to be thriving. Grameen seems to be filling a need as great in the US as it was in Bangladesh.

"Since opening its first American branch in January 2008, Grameen has found fertile ground. It has lent more than $25m to 7,300 borrowers. At 15%, interest rates are high, but far less than a loan shark or payday lender would charge (the annualised interest on a payday loan is typically 400%, sometimes twice that), and there are no other fees or collateral required. Grameen America’s repayment rate is around 99%. It now has branches in four of New York’s five boroughs, and plans to open in Washington, DC, North Carolina and California. It also has one in Omaha and Indianapolis."

Loans are provided for the purpose of starting or expanding a small business venture like Sabina’s. Savings plans and other financial services are also provided. A similar method of developing social capital as collateral has been utilized.

This makes a fascinating example of globalization in action. Although we probably lose more than we gain, occasionally there are some good things that can be identified. Wanting to leave on a positive note, let’s see how Sabrina is doing.

"Having moved from shopping trolley to shop-front, Sabina has built a website advertising her flower-arranging and bought a refrigerator to keep the flowers fresh. She hopes to buy a delivery van next year and eventually to open another shop in the suburbs. Sometimes macrodreams start with microloans."

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