This past weekend, I went out to St. John's University in Queens, NY, to meet up with a bunch of officials from the Grameen Bank, including Nobel prize winner Muhammad Yunus. For those who don't know, Grameen is a bank which specializes in giving very small loans (average size: $250) to very poor people, typically helping them buy supplies to start small businesses. Yunus started it back in the 1970s in Bangladesh, because he felt the World Bank and other big development organizations weren't getting around to his country fast enough. Local banks wouldn't help the poor, either. Very poor people are almost never considered credit-worthy by commercial banks, because they have no collateral, and often times can't supply basic forms of identification, paperwork, etc. Yunus decided to take a chance that the poor would pay off their credit. Three decades later, he runs an operation that lends $100 million per month, reaching 8 million people in over 100 countries. This year, Grameen opened its New York operation, which it hopes will be the first of 25,000 such branches in the U.S. "I want Grameen lending to be as ubiquitous in this country as fast food," says Grameen America president Vidar Jorgensen.
The idea of a Bangladeshi bank finding a market in America while Wall Street implodes is fascinating for all sorts of reasons. Aside from the fact that Grameen consistently pulls millions of people out of poverty each year, there are two particularly interesting things about the bank that are worth noting amidst the global financial crisis. One, Grameen has a 98 percent average payback rate globally. Two, the financial crisis has had, according to Yunus, no effect whatsoever on the bank's operations. To be fair, this is in part because most of the people that Grameen services didn't have a stake in real estate or stock markets to begin with, let alone complex derivatives. But, the Grameen lending model does hold lessons for commercial banks. Grameen bankers conduct serious due diligence on loan candidates, visiting their homes, talking to neighbors, etc -- this is old school banking, a little bit like the kind I remember growing up with in rural Indiana, where you were likely to run into your mortgage lender at the basketball game or grocery store.
After Grameen candidates are accepted, they are paired with other borrowers in groups of five or so, meeting weekly with bankers and with each other to pay back loans in small installments. If one member of the group can't pay, no one else can increase their loans. If anyone has a problem, the individual banker and the other loan recipients are on site to hear and to help. The peer pressure works. There's no splicing and dicing at Grameen -- borrowers and lenders have to look each other in the eye, and the system is completely transparent.
Jorgensen not only wants to help get credit moving for the poor in America (his goal: to compete with the $80 billion payday lending industry, which charges nosebleed fees that can devastate people--for more on that check out this excellent April article in Harper's). He also wants to bring the Grameen model of lending to the middle class, helping to fill the credit void, and bringing greater transparency to the lending process. "In the last twelve months of the average foreclosure in the U.S.," notes Jorgensen, "there is no contact whatsoever between borrowers and lenders, in part because the loans are so removed from their origins that nobody knows who's holding what." Since opening, Grameen America has loaned out $1.4 million to 600 borrowers below the poverty line. The payback rate so far: 99.95 percent. It's not yet a fix to the financial crisis, but its certainly speaks to the idea that "subprime" may be less about the borrower, than the banker.
Btw, I'll be writing a longer feature on Grameen America in an upcoming issue of Newsweek, so watch this space.
