Microlender Grameen Growing But Needs Capital

The microfinance lender Grameen America Inc. boasts some big numbers, having lent more than $13 million in its first three years.

Though this may have quieted some of the naysayers who questioned whether its model would succeed in the United States, Grameen says it has more work to do.

"We are now receiving sufficient funding to meet the needs of our borrowers, but much more is needed as we continue to rapidly expand," Chief Executive Stephen Vogel wrote in an e-mail.

Grameen promotes a nonprofit-group lending model, pioneered in Bangladesh by Nobel Peace Prize-winner Muhammad Yunus, as a fit for this country, which, though much wealthier than Bangladesh, has pockets of deep poverty.

Since April 2008, Grameen America has lent to 5,000 borrowers; its average loan is about $1,500 (some borrowers take out multiple loans). The company is lending about $200,000 a week.

Despite this momentum, Grameen is not yet self-sufficient — meaning it does not generate enough interest income to fund future loans and cover operating costs. Instead, it is relying on grants and loans to support its operations and to help it expand.

"I don't know if anybody in the States has been able to cover their costs using" Grameen's model, said Kim Wilson, a lecturer at the Fletcher School at Tufts University, who has a background in microfinance.

"In other countries, the cost structures are a little bit different," she said. "You can charge much higher interest and get away with it. Bangladesh is very densely populated. You can reach a lot of people within an arm's length. That's obviously not how it is in the United States. You have to pay salaried loan officers and give them benefits. … Also, we have other alternatives."

Ultimately, Wilson asked, "Does it make sense to expand before the business model is proven?"

Grameen, which operates three offices in the New York area and one in Omaha, Neb., insists expansion does make sense, particularly into San Francisco, where it announced the opening of an office last week. Fueled by the roughly 10% unemployment rate in the San Francisco area, Grameen said it expects its West Coast branch to help as many as 250 borrowers and distribute about $300,000 in microloans in its first year.

Robert Annibale, the global director of microfinance at Citigroup Inc., which provides savings accounts to Grameen clients, said he's encouraged by Grameen's momentum and growth.

Last week, the nonprofit announced that it had gotten $1 million from the energy company Chevron Corp. to fund the expansion.

Grameen estimates it must raise about $6 million in order to reach sustainability in a new market within five years.

Fund raising has proven to be its biggest challenge.

"We are a model designed to reach sustainability within five years; however, our growth and scalability has been restricted by access to available funding," Vogel said.

Other than San Francisco, Grameen is also looking to expand into Washington; Charlotte, N.C., and Indianapolis.

Those who work closely with Grameen say the organization takes a conservative approach to expansion.

"They want to make sure they are properly funded before opening a new location," said Dorothy Broadman, the managing vice president of community development banking at Capital One Financial Corp., which has helped fund Grameen and offers its clients no-fee, no-minimum-balance savings accounts. "They're very thoughtful before they go into a new market."

Microfinance has been a popular and successful business in developing countries worldwide for decades. Grameen America has its roots in Grameen Bank, which Yunus established in Bangladesh in 1976.

But the idea of making very small loans to low-income entrepreneurs and small businesses has faced some criticism lately, with the emergence of for-profit lenders that have been accused of using aggressive marketing tactics and charging exorbitant interest rates for their loans.

Separately, Yunus has become ensnared in a scandal in his home country, accused by the government of tax evasion.

But advocates in the U.S. and abroad continue to champion the nonprofit microfinance model. If anything, Grameen's capital constraints are evidence that more needs to be done to ensure microlenders' survival, said Connie Evans, the president and CEO of the Association of Enterprise Opportunity, a nonprofit industry organization that represents microenterprises.

Sustainability "is really tough to achieve," she said. "They are having to make trade-offs now in terms of where they go and how they raise funds."

"It should send an alarm to everyone about what is really needed to make microenterprise in America sustainable," Evans added. "It takes loan capital as well as working capital."

Grameen uses a group lending model, a different approach from that of other microcredit providers in the U.S. like Accion USA or Kiva. A would-be borrower finds four other people who are also interested in micro-loans and forms a group. Each group member is also required to open a savings account (currently offered through either Citi or Capital One).

Loans are offered on terms of either six months or a year, at 15% interest. Borrowers pay principal plus interest weekly, in addition to deposits into their savings accounts.

The idea is for the group, which meets once a week with a Grameen representative, to be a support system for borrowers.

Each borrower is responsible for the repayment of his or her own loan, but if the group has a perfect repayment record, borrowers are eligible for larger subsequent loans, creating an incentive to keep peers on track. Grameen also helps borrowers build credit by reporting their loan payment history to the credit bureau Experian.

"These aspects of our program have proven to be a very effective tool in ensuring high repayment rates," Vogel said.

"The peer-lending model from Bangladesh is working here in the United States," he said.