The Unbankables
If you lend small amounts of money to the working poor—people with no assets, no credit, no savings—can their American dreams come true?
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I looked around at the students. They were all wearing nice clothes; many, like Washington, had come from day jobs. The PLAN Fund isn’t for the destitute, those who are more concerned with scrounging dinner than maximizing their Web presence. It’s for the working poor. The typical PLAN Fund borrower is a 38-year-old with a household income of $29,700 a year, or 58 percent of the U.S. median household income. But she (three quarters of PLAN Fund students are women) also has poor credit, no bank accounts, and no home equity. “We’re talking about the basics,” Irvin Ashford, a Comerica banker who sits on the board of the PLAN Fund, told me. “No checking account, bad credit; they don’t know how to pay bills; they go to check-cashing places and liquor stores for loans. They’re unbankable. A middle-class person who wants to start a business goes to family and friends, because those are the people who believe in you. The PLAN Fund is that system for these people.”
Microcredit was born in the aftermath of one of the worst natural disasters in the past fifty years. In 1974 Bangladesh had just won independence from Pakistan in a bloody war, only to be slammed with a series of cyclones, floods, and droughts that brought on an unprecedented famine. Historians estimate that more than a million people died. At the time, Muhammad Yunus was teaching economics at Chittagong University, on the Bay of Bengal. Walking to and from the classroom, he passed women and children starving to death in the streets, and the experience pushed him to look outside academia for a real-world solution. He began knocking on doors, talking to the poor.
In 1976 he met a young woman with three children who made bamboo stools for a living. To pay for the bamboo she had to borrow from middlemen who demanded she sell the finished stools back to them as payment; her profit was a mere 2 cents per stool. She couldn’t borrow from the local moneylenders because their rates were exorbitant. She couldn’t go to a bank for a loan because it wouldn’t give loans in such small amounts, especially to someone so poor. As Yunus wrote in his 1997 autobiography, Banker to the Poor, the woman was “a bonded slave.” Her only way out, he figured, was credit. With credit she could buy the bamboo on her own and sell the stools on her own, in the free market.
Yunus decided to try an experiment. He had one of his students put together a list of 42 villagers who drove rickshaws or made things like pottery and mats; then he loaned these people small amounts to buy their own raw materials and sell their products at their own rates (the total Yunus initially gave out was less than $27). Next he went to a bank and borrowed $300 to make more loans. To his surprise, almost all the people repaid the money. In 1977 he founded an experimental branch of a local bank to make these “microloans.” It was called Grameen, from the Bengali word for “village.” No collateral was needed. Yunus made borrowers work in groups of at least five—for support among members but also to take communal responsibility for the loan. He sought out women, both because it was almost impossible for them to get loans in a Muslim society like Bangladesh and because in his experience, women were more responsible than men and more likely to use their extra income to support their families. Many of the Grameen loans were only $25, a lot of money in rural Bangladesh. Interest rates were high, up to 20 percent, but not nearly as high as those of the local Tony Soprano.
Grameen was so successful (in some years the repayment rate was 98 percent) that soon international development banks were loaning it millions of dollars to work with. In the eighties, Grameen added branches throughout Bangladesh. At each one the story was the same: Without much in the way of collateral or training, a person could come in and get a small loan to buy a milk cow, fix a cart, or sell some rice on the street.
Yunus’s philosophy was based on his faith in the free marketplace. “I believe in the central thesis of capitalism,” he wrote in Banker to the Poor. “The economic system must be competitive . . . an entrepreneur is not an especially gifted person. I rather take the reverse view. I believe all human beings are potential entrepreneurs.” Gradually, Yunus became something of a celebrity. He traveled the world, preaching the gospel of microcredit to enraptured crowds and winning over converts like Kofi Annan, Bill Clinton, and Bono. In 1997, with Yunus’s blessing, an offshoot of Grameen was launched to give small loans in Latin America, Africa, and the United States, where most banks won’t consider making business loans of less than $10,000. Yunus asked Alex Counts, an American he had worked with in Bangladesh, to run the nonprofit, which was called the Grameen Foundation-USA (later simply the Grameen Foundation). When Yunus came to Dallas to give a speech promoting the new venture, a local social worker named Gwen Moore was in the audience with her husband.
“I wasn’t expecting to be so inspired that night,” Moore recalled. “My husband and I, we said, ‘We’ll never meet another person like that in our lives.’ We thought we’d met Gandhi. One thing he said that night was ‘It only takes one’—to make a difference. I gave notice at my job that week.”
With Regina Nobles, who worked for Dallas City Homes, a low-income housing developer, Moore started an experimental Grameen-inspired loan program. They’d made thirty loans when, in October 1998, they invited Counts to come and see their operation. The Grameen Foundation was already working with one American group, Project Enterprise, in Harlem, and Counts and Yunus liked what they saw in Dallas. “Dr. Yunus urged us to get involved,” Counts told me. “Our basic approach was to apply and adapt the Grameen approach to the troubled neighborhoods of Dallas.”
Almost three fifths of Dallas was in the low-to-moderate income range, and Moore, Nobles, and Counts were determined to change that. “We really wanted to help a lot of people,” Moore told me. “Our original business model called for helping two thousand people in five years.” They called the new organization the PLAN Fund. Like Grameen, it used the peer group model as much as possible (PLAN stands for Peer Lending Action Network). Borrowers went through a ten-hour “certification process” in basic business ideas, then they got loans, an average of $1,000 each. “We didn’t want the PLAN Fund to be cautious,” Counts told me. “We had an aggressive, proactive model. We went out with live bullets. We asked them to take risks.”
They did, making loans to 351 people in those first few years, sometimes without a credit check, indeed without a lot of rules or restrictions. The results, it became clear, were not worthy of any Nobel Peace Prizes. “The word on the street,” said Moore, who is now the president of the PLAN Fund’s board of directors, “was that we were easy money.” Moore and Nobles’s good intentions had gotten in the way of good business sense. The people getting chunks of money weren’t asked to give much in return, and many didn’t; their businesses never took hold, and few borrowers paid back their loans. The default rate eventually soared to 40 percent. “We wanted to work with people, help them succeed,” Moore explained. “So when they weren’t paying on their loans, we let them slide.” Though many businesses did succeed, including S&A Oxygen Express, the leaders of the PLAN Fund realized they had to reevaluate the fundamentals of microcredit. “We dreamed too big,” Moore said. “You come in with naiveté: ‘We can fix anything.’ You learn it’s not so easy.”
The problem was that the Grameen model had not been developed with the First World in mind. In Bangladesh, as in most desperately poor Third World countries, a majority of people make their livings, such as they are, through some kind of entrepreneurship—
selling pencils on a street corner or taking in laundry to wash. The alternative is starvation. By contrast, maybe one in twelve Americans runs his own small business. Our sophisticated, super-regulated economy makes it hard to work for yourself and offers plenty of jobs working for someone else. It also offers plenty of buffers to starvation: the minimum wage, food stamps, or at the very least a daily lunch at the Salvation Army. Another big difference: In Bangladesh the peer groups have a genuine social cohesion; a loan would go to a group of women who often shared in the basics of daily life, such as getting water from the same well. In Dallas, borrowers in a group were usually strangers who were scattered around the city.
These inherent differences between the Third and First worlds have led some economists to question the promise of microcredit in America. One 2001 study argued that “in the first world, microenterprise is not a panacea but a vitamin.” It went on to conclude that “most of the poor will reach the middle class through education and wage jobs.”
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