Microlending is a relatively simple concept that can be complicated to evaluate. The theory behind it, pioneered by Nobel Prize-winning economist Muhammad Yunus, is pretty straightforward. By accessing small loans at moderate interest rates, impoverished borrowers can invest in building small businesses, getting an education or making household improvements — and thus helping to remove their families from poverty.
Microlending programs and products have mostly been associated with consumers in developing nations — particularly in sub-Saharan Africa — over the last decade. Their effects have been mostly viewed as positive, though how much impact those programs have had in developing world borrowers has been the subject of some recent debate.
But what has gotten less attention — largely because the practice is less common — is how microlending operations play out in developed nations like the U.S. Can a tool for fighting poverty in Bhopal work for customers in Brooklyn?
Grameen Bank — the bank founded by Yunus, and one of the pioneering leaders in microlending around the world — has recently released a report on the subject. The answer, perhaps surprisingly, is yes: U.S. customers in poverty can benefit from micro-borrowing counterparts in the developing world, and in many of the same ways.
Though, as is also the case in the developing world, “benefit” and “solve for entirely” are very different concepts.
An American Tale
Though Grameen Bank has offered microfinancing products since its founding in 1983, its story in the U.S. is much shorter. The firm has only been offering microfinancing to U.S. consumers since 1998.
Andrea Jung, president and CEO of the nonprofit Grameen America, said that, particularly in the early days, there was a problem with perception. “People had a hard time believing this kind of product could work here, because the economic terrain was so different.”
“In Bangladesh, a $100 loan can be life-changing — in Los Angeles, that isn’t funding enough to think about starting a business,” she said. “So I think we spent a lot of time overcoming an idea that we were just picking up our exact offerings from halfway around the world and dropping them unmodified into U.S. markets.”
But, Jung noted, that isn’t an entirely reasonably comparison — an iPhone that has been modified to display Chinese characters also won’t work all that well for a Chinese customer, but that isn’t a reason to infer that iPhones can’t work in China. It is a sign that a modification needs to happen.
Which is what they’ve done, she pointed out: They have modified the loans in terms of amount, interest rates and terms, while holding onto the parts of the program that have most closely correlated with success in other markets. The most important of those is the team aspect of the lending: The microloans (usually in the low four-figures) are given to small groups, and all members of the group are accountable for ensuring each member makes payments.
Just as importantly, though, they also track their data and monitor how their participants are doing.
Grameen America has released its first study on that subject: “Microfinance in the United States: Early Impacts of the Grameen America Program.” Focused on 1,492 women in 300 loan groups in New Jersey, the study sorted participants into two buckets: those who applied and received a loan and those who did not. Both groups agree to be tracked over time – at three, six and 18 months, respectively – to measure their progress. This first study is the first six-month check-in.
The results, thus far, are positive.
“The Grameen America program produced improvements in several measures of material hardship — for example, how often the respondent ran out of money in the three months preceding the survey, the respondent’s ability to afford necessities and the respondent’s current financial situation compared with the previous year,” the report states.
Moreover, Jung noted, the data supports the idea that these kinds of programs can help improve all kinds of global poverty, wherever it exists.
“These borrowers are often going to be excluded as a cohort from mainstream channels,” Jung said. “That’s a mistake, because we’re seeing these women have the potential to serve as powerful economic engines in their communities, and access to capital has the power to unlock that.”
Others, however, aren’t so sure.
A Long Journey
Since the new Grameen report came out, the standard line of questioning has focused on where improvements have not yet been seen. While improvements to participants’ financial lives were noted, the metric on income has not yet been reported.
The most recent six microcredit studies, published in 2015, were conducted by economists working independently across six countries. All consistently came to the same result: Average income was not any higher for those people who had received microloans than those who had. The study did note some modest effects — more small businesses and minor spending pattern changes, mostly — but nothing even close to successfully moving people out of poverty.
“We note a consistent pattern of modestly positive, but not transformative, effects — not the result that many people had hoped for,” the study noted.
But Jung said such studies seem to reveal more a mistake in expectations than a failure of microlending. There are no quick fixes for poverty — and if there was a simple, cheap solution out there, someone probably would have already discovered it.
“Those incremental increases, the not running out of money, not paying late fees, putting a little bit away, developing job stability through a stable business — [are all] small steps that add up to being financially stable or not,” she noted. “And no one can make it out of poverty unless they are financially stable, period.”
There are no quick fixes — instead, there are a lot of long days and a lot of long journeys for customers, Jung said. What this study shows, she noted, isn’t that it is easy to get out of poverty. It shows that people, working together, can slowly build their own paths out, if they are given proper institutional support.
“We can offer people the tools to build a ladder out of poverty, but climbing that ladder is still going to be a significant challenge,” Jung said. “But we have seen people can handle a challenge, people can thrive with a challenge. Our job is to give them the tools they need to try to live up to that challenge.”