Poverty and microcredit

Ever since I read about Muhammad Yunus winning the Nobel Peace Prize for his Grameen Bank in his native Bangladeshi, I wondered why no one in the United States had thought of doing something similar for small businesses especially as credit got tighter.  Buried in the business section of yesterday’s New York Times was the story of the Grameen Bank in the Jackson Heights section of Queens.  There was microcredit offered in parts of the United States, I just didn’t know about it.  This, according to the Times story by Shaila Dewan, is how it works.

On a recent Thursday, dozens of Latina immigrants clustered in a small, noisy second-floor office in the Jackson Heights neighborhood of Queens, waiting for one of a half-dozen loan officers to call their names and hand over a check. Children loitered in the stairwell or sprawled, calflike, over their mothers’ laps.

The loans were recorded the old-fashioned way, with ink, in green passbooks that enumerated the borrowers’ commitments to “exercise responsible financial behavior,” “seek preventative health care” and meet each week in a “comfortable and safe place.” Aside from these words, little secured the loans in question, which ranged from $1,500 to $8,000.

In the United States, microcredit has generally been defined as loans of less than $50,000 to people — mostly entrepreneurs — who cannot, for various reasons, borrow from a bank. Most nonprofit microlenders include services like financial literacy training and business plan consultations, which contribute to the expense of providing such loans but also, those groups say, to the success of their borrowers.

Grameen America dispenses with the advice and makes smaller, less formal loans at a lower cost. It hews closely to the model developed in Bangladesh: borrowers form groups of five, approve one another’s loans and make weekly payments at 15 percent annual interest, a rate comparable to those charged by other nonprofit lenders. That is far less than the rates of payday lenders, which can charge 400 percent or more.

If everyone in the group repays on time, each member is entitled to a larger loan in the next cycle. Members are supposed to be below the federal poverty line when they join and use the money for entrepreneurial purposes. Grameen does not ask if they are legal residents.

What are the women doing with the loans?

In Jackson Heights, borrowers said they used the money to buy costume jewelry, Herbalife nutritional supplements or Mary Kay cosmetics for resale in home-based businesses or door to door, many supplementing income from another job like housecleaning. Some make cakes or empanadas; others tailor clothing or sell flowers. One woman buys designer clothes at closeouts and resells them from a tiny shop on the second floor of a commercial complex; another sends clothes home to the Dominican Republic, where her sister sells them on the street.

S. M. Nural Kabir fills out papers for borrowers, many of whom lack access to credit

S. M. Nural Kabir fills out papers for borrowers, many of whom lack access to credit

The question is:   Will selling Mary Kay bring a lot of families out of poverty?  Two women with storefront business were profiled in the story.

…Guadalupe Perez, 51, took a loan when business fell off during the recession. She and her husband were having trouble paying rent on the party decoration store they had started with their life savings. “It opened up a way for me to keep my business,” she said through an interpreter, standing near a display of ribbons and wine glasses that she had embellished with glittery designs. “I wanted to hear what the rules were for Grameen because I was afraid of going to a bank. It was a loan that I could pay little by little; I felt it was a good choice for me.”

Ms. Perez has used subsequent loans to expand the size of her store and now plans to invest in enough tablecloths to decorate two parties at the same time. But the loans have not increased her enthusiasm for entrepreneurship. Asked whether, had she the chance to do it over, she would go into business for herself, her answer was short and simple: no.

Ms. Perez said she and her husband worked every day and earned $500 to $600 a week, or about $29,000 a year — a “very low” income by federal standards for New York. They are not able to save.

Elizabeth de Jesus, 45, is a hairdresser who, with Grameen’s help, achieved her dream of opening her own salon in Corona, Queens. But she is unable to estimate her annual income. “I don’t know because I don’t keep it,” she said. “I spend it all on the payments, on the rent, on food. I spend it every week.”

The life of a small business owner is always difficult and I was surprised that there wasn’t more financial planning and management training provided by Grameen to those receiving loans.  There is, however,  one very bright light in the story:  establishing credit.

Grameen helps its clients in another way that many experts say is more important than increasing income — it establishes good credit scores. Many poverty alleviation groups have shifted their focus from saving to credit building, because people with poor or no credit must leave large deposits for basic needs like utilities, have trouble renting decent housing, pay much higher interest rates and have a harder time finding jobs.

Nayrobi Gonzalez de Quiroz, 26, recently received her first Grameen loan but decided not to follow through with her plan to buy handbags for resale. After using about $200 to pay off a debt, she said, she decided it was safer to leave the money in the bank and make the payments from her earnings as a manicurist.

“Here, you have to have good credit,” she said. “I have a young son and I have to think about his future.”

The results appear to be mixed.

Good data on the benefits of microcredit are scarce, and the few randomized studies have not demonstrated that it substantially improves prosperity in developing countries. In the United States, data collected by the Field program of the Aspen Institute show that microloans yield significant increases in income and create jobs. Joyce Klein, the program’s director, said the surveys had limitations but more rigorous studies that included randomized control groups would be prohibitively expensive.

Grameen says that its loan recipients have increased their incomes by an average of $2,500 during each six-month loan cycle, and that one in five hires an additional worker. But Katherine Rosenberg, a senior vice president at Grameen, acknowledged that pinning down income data is the group’s biggest challenge, because borrowers tend to think in terms of whether they have enough to cover their next bill, not how much they make over all. Ms. Rosenberg said many clients may not earn more but instead work less, dropping one of several low-wage jobs or taking advantage of the flexibility of self-employment to spend more time with their children.

Peer pressure produces a good repayment rate on microloans and I know they are not a magic bullet and way out of poverty, but it appears they have other benefits for those women who want to start businesses and/or build credit.   There is no easy way to break the cycle of poverty.

Photograph:  Ruth Fremson/The New York Times

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