LOS ANGELES The microfinance pioneer Muhammad Yunus takes rightful pride in the lending model he developed in Bangladesh. He's the Nobel Prize-winning founder of Grameen Bank, which makes affordable small-business loans to women in poor villages, and does not rely on charity.
"Grameen Bank is a self-sustaining institution in Bangladesh," Yunus said in an interview Sunday. "It pays about 20% to 30% dividend every year. Borrowers are the owners of the bank."
The situation is different in the United States. Grameen America has been making loans since 2008, but it is not a bank. And that is why Yunus found himself on stage here Sunday, spreading the microfinance gospel to an audience of potential Grameen America donors.
"Since it's not a bank, it cannot take deposits. That's why they have to have this meeting to raise money," Yunus explained.
Sunday's event was a fundraiser for Grameen hosted by California Community Foundation, a philanthropic organization with assets of more than $1.4 billion. It featured testimonials from three women, two of them single mothers, who are using Grameen loans to build small businesses. One operates a small fitness business in a predominantly Latino part of Los Angeles. Another is starting her own floral business. The third woman rents out party supplies, and has used the proceeds of a loan to buy enough tables and chairs that she is now able to supply two parties at the same time.
Banks generally do not make this kind of loan. The amount of money involved is tiny. The businesses are unproven.
The borrowers often lack collateral.
"At the very bottom, there's nothing except payday lending," said John Kobara, the foundation's chief operating officer.
Grameen America's borrowers receive uncollateralized loans, starting at $1,500. Most of the loans have six-month terms. They carry a 15% interest rate, with no additional fees. The repayment rate is 98%, according to the nonprofit lender.
The borrowers, who are mostly but not exclusively women, form groups of five to support each other. Yunus said that the collaborative structure gives confidence to people who otherwise might not believe in their ability to pay a loan back. "When you see your friends are doing it, you feel more bold," he said.
Grameen America, which currently operates in 11 U.S. cities, including New York, Boston, Omaha and Indianapolis, has ambitious expansion plans in Southern California. So far, operating from two branches in heavily Latino neighborhoods in Los Angeles, the organization has invested over $4 million in more than 2,000 women-owned small businesses.
But over time, it plans to expand to 13 branches in Los Angeles County, and to invest more than $650 million in 91,000 businesses.
To fulfill those plans, Grameen America is relying on the largesse of donors. The event Sunday was held on L.A.'s wealthy West Side.
During a question-and-answer session with the audience Sunday, Yunus said that one of the biggest problems for Grameen America involves what to do with its borrowers" savings. The borrowers are encouraged to set aside $2 per week as savings.
But as a nonbank, Grameen cannot accept the funds as deposits. And it has not found one single bank to set up consumer-friendly savings accounts for all of its customers. Instead it has taken a piecemeal approach, partnering with multiple banks.
"We cannot find any single bank which will accept the $2," Yunus, who serves as chairman of Grameen America, told the audience. "That is the biggest struggle. And it's still a struggle. It's not a resolved issue."
But afterward, Grameen America President Andrea Jung downplayed the notion that finding a place to put its borrowers" savings presents a challenge for the organization.
"Grameen America partners with local and national banks including Citi, Capital One and Wells Fargo, which have collectively opened tens of thousands of no-fee, no-minimum-balance savings accounts for our borrowers," she said in an email Monday.
Regardless, it is clear that not having a license as a bank or a credit union has hamstrung Grameen America to some degree.
Jung said that Grameen America expects to continue working with commercial banks, but she added: "The long-term prospects of Grameen America considering a credit union structure could be of strategic benefit to our members."
From a financial standpoint, each Grameen America branch hits the break-even point around 4,000-5,000 borrowers, according to the organization. That may take five years or longer.
"Grameen America's goal is to become sustainable on an organizational level so that in the future we will no longer require philanthropic support," Jung said by email.
Yunus said he wishes that Grameen America could become a bank, but it is not feasible.
"We tried. But it's too expensive to become a bank. And then you're caught into the regulatory regime of the bank that you cannot do this, you cannot do this," Yunus told American Banker.
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Corrected November 25, 2014 at 12:34PM: An earlier version of this story incorrectly stated that all three of the women who gave testimonials for Grameen America at a fundraiser Sunday are single mothers.