If this microfinance venture by Grameen Bank is as successful as I hope it will be, it will be an indictment of US banks who provide only very high priced products to the lower income and poor, and then justify it by claiming that they offer a useful service. They of course prey on the prejudice that the poor by definition are bad risks, and compensate by putting high credit spreads into their products.
Another approach would be to screen potential clients much more thoroughly, and find borrowers who looked capable of meeting their obligations. Doug Smith in Slate informed us that not-for-profit mortgage lenders had defaults comparable to prime borrowers in their subprime portfolios due to careful screening and borrower education. But that takes more work and is less lucrative. Competition will show whether the conventional view is correct or merely self-serving.
From the Financial Times:
Bangladesh’s Grameen Bank has made its first loans in New York in an attempt to bring its pioneering microfinance techniques to the tens of millions of people in the world’s richest country who have no bank account.
The bank’s entry into the US, its first in a developed market, comes as mainstream banks’ credibility has been hit by the mortgage meltdown and many people are turning to fringe financial institutions offering loans at exorbitant interest rates.
“Now is a good time because of . . . the subprime crisis and that highlights the issue that the financial system is not perfect,” Muhammad Yunus, the bank’s Nobel Prize-winning founder, told the Financial Times.
Grameen has lent $50,000 in the past month to groups of immigrant women in Jackson Heights in New York’s borough of Queens. During the next five years, it plans to offer $176m in loans within New York city, and then expand to the rest of the US.
In Bangladesh, Grameen lends to poor women seeking to start small enterprises who cannot borrow from banks because they do not have accounts or a high enough credit rating. The bank, which started with $27 in loans Mr Yunus made to 42 women in Bangladesh in 1976, has now made more than $6.5bn in loans to 7m people in the country.
In the US, about 28m people have no bank accounts and 44.7m have only limited access to financial institutions. People often do not hold bank accounts because they have had credit problems, have no access to a local branch or they distrust the mainstream financial system, said Jonathan Morduch, a microfinance expert at New York University.
Some microfinance experts doubt that Grameen could make an impact in the US where credit is widely available, and businesses and tax systems are much trickier to navigate than in developing countries.
After beginning with small loans to micro-entrepreneurs, Grameen plans to expand into other businesses such as remittances and mortgages.