There seems to me to be something almost spiritual about microfinance – as if the idea was handed down by a higher power for the greater good of mankind. Can you think of another simple idea that satisfies so many human needs in one go? A micro-loan helps poor people who wish to help themselves and allows the staff of a micro-bank to feel they are giving something back to society. Meanwhile, a strong microfinance organisation can extend loans to people who go on to develop businesses that frequently increase the output of national economies.
Muhammad Yunus, the founder of Grameen Bank, said he first realised microfinancing could help poor people get on their feet when he met a group of desperately poor Bangladeshi merchants in the mid-1970s. Yunus said these people lived in fear of money lenders who took nearly all their profits. Collectively the outstanding loans came to just $27. Yunus gave them the cash from his own pocket and set them free from the tyranny of the debt collector’s thugs. Today there are thousands of microfinance companies all over the world. The basic idea behind microfinance is simple and tends to follow the Grameen example. A small amount of credit, at a reasonable interest rate, is offered to people who are considered too risky by traditional financing sources. Often the amount borrowed is around $100 – sometimes more, sometimes less – which is used to buy tools, or to decorate a shop, or to buy stationery or to take on a new member of staff. Grameen also pioneered a unique model of providing micro-loans through peer lending. This is where individuals who wish to take out a micro-loan recruit other potential borrowers to form a peer group. The group provides its members with support and holds them accountable to one another, creating a powerful form of social collateral and a good reason to pay back the loan on time. Here in the US rules and regulations make microfinance a little more complicated than it is in Bangladesh, Africa or parts of Latin America.
New York initiative
I have just visited the oldest microfinance company in New York. Project Enterprise was founded in 1997 by a husband and wife team who wanted to do something for the one-in-four New Yorkers who live in poverty through unemployment, under-employment, very low paying jobs or ill health. In the 12 years since, it has provided loans and business training to more than two thousand entrepreneurs who would otherwise have been denied access to start-up capital, or could only receive it at very high cost. Project Enterprise currently has 450 members. Some are borrowers and many more joined to take advantage of the business training programmes on offer. Seven years ago, Mustaqueem Abdul Azeem was behind bars at New York’s infamous Rikers Island prison. On his release day he felt the urge to use his personality to try his luck as a salesman. As an ex-con, his chances of landing a full time position or a traditional bank loan to start his own business were zero. But now he sells health and beauty products from a street vendor cart outside a coffee shop on 125th Street in New York’s Harlem district. “I started out literally with a little fold-up card table,” he said, “and two products, a little bit of Shea Butter and a little bit of raw black soap.” Today, Mustaqueem employs five other people. He has a website, a van and a six figure balance sheet. He’s pulled this off in one of the city’s poorest districts by working with Project Enterprise. Catherine Barnett, the Project Enterprise interim executive director, said anyone with a flair for business is welcome. “We title our programme small loans, big connections, so some people come for the small loans and some people come for the big connections which include the training and the networking,” Barnett said. Red tape But in a country where 40 million people have no access to a bank account, the number of applicants for microfinancing is growing at a smaller pace than in developing countries. Lisa Servon, professor of Urban Policy at the New School in Manhattan, said: “In the US if you want to sell empanadas you have to have your kitchen inspected. “You have to have a licence, there’s a lot of things that go along with it and what the result of that is for the micro-enterprise development movement here is that there’s a lot more training.”
In the US microfinance organisations tend to be NGOs or non-profits relying on generous benefactors while the Grameen Bank of Bangladesh turns a profit each year from which it can lend to new borrowers. Lisa told me that the recession and credit crunch has made raising funds for micro-loans in the US far more challenging. “Given that they do survive though philanthropic dollars often times they are less of those dollars available now every foundation every corporate donor is cutting their grants,” Servon said. The fact that sub-prime housing loans given to poor people have been blamed for sparking the recession, the credit crunch might also make raising funds for microfinance in the US more difficult in the future. There are also severe doubts about whether the microfinance business model can be sustained in America because a strong small business culture means microbusinesses are often overlooked on every level. But don’t tell that to Mustaqueem Abdul Azeem – he admits to feeling the recessionary pinch like everyone else – but he has just asked for another $6,000 to expand his health and beauty products business with a stall in a shopping mall in a rich town to the north of the city.