Micro-Credit Institution Offers “High Risk,” Job Creating,
Small Business Loans with 99% Payback Rate
by Jon Kennedy
Grameen America has developed a system that successfully creates small business entrepreneurs within impoverished United States neighborhoods. Although the borrowers often lack prior business knowledge before entering the program, of those participating, 99% pay back their loans in full.  In a time of widening income gaps, microcredit is proving itself to be an effective tool in improving standards of living and emotional well-being, particularly for those usually considered poor risks for capital to start new job-creating companies in areas of high unemployment.
Microcredit is the extension of very small loans (called microloans) to those in poverty designed to spur entrepreneurship. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor. 
Poverty and Lending Practices in the U.S.
In 2009, 36 million people living in the United States were considered below the poverty line. The year also saw an 8% increase in unemployment. In 2008 the national poverty rate was 13.2%. In 2009 the rate rose to 14.3%. The U.S. poverty line is denoted by individuals earning less than $11,000 or families of four earning less than $22,025 annually. 
Financing is critical for anyone wanting to launch or maintain a small business, however commercial banks have tightened their credit restrictions beyond the reach of anyone at or below middle-class standards. Traditional lending organizations review income level, education level, guarantors of established credit (including rent and utility payment history) and records of bank accounts – making it difficult for the poor to gain access to capital to start a new business.
Muhammed Yunus, founder of Grameen Bank (the model on which Grameen America is based) states, “you need a dollar to earn a dollar, and the poor do not have access to that first dollar. Grameen will supply that first dollar to the very poor based on trust.” 
The microcredit lending system was created by Yunus as well. He began lending his own money to poor people in Bangladesh, asking them to pay it back when possible. The concept eventually caught on and is currently spreading across the globe. The United Nations designated 2005 as International Year of Microcredit and Yunus was awarded the Nobel Peace Prize in 2006.  
Grameen America’s History, Lending Practices and Program
Grameen America opened its first office in NYC January 2008 during the largest financial crisis of the modern era. The organization uses a group lending and savings model that has been developed and refined for over 30 years. There are currently 4 branches in operation with more opening in Washington D.C., California, Florida, Georgia, Massachusetts, New Jersey, North Carolina, and Indiana. 
Supporting funds are received from donations, grants and loans from private donors, foundations, corporations and lending institutions.
Grameen loans have a term of 6 to 12 months. Initial loans are less than $1500. Larger loans are available after a track record of timely repayment has been established. All microloans are used as income generating assets to establish a new or expand an existing small business.
Interest charged on these microloans is 15% - which compares favorably to the current credit card rates in the high 20’s, and is a fraction of what check cashers and pay day lenders typically charge.
To participate in the program, borrowers do not need a current bank account, established credit history, collateral or guarantors.
To get started, potential borrowers are required to create or join a 5 member group of friends and trusted peers living below the poverty line. Each person must be a resident of the same community. Once formed the group participates in a 5-day financial training program. The poverty alleviation cycle is a continuous feedback loop of financial education, savings, mentoring, credit building and access to capital. 
Benefits to Microloan Recipients and Local Economic Development
Borrowers use microloans to start, build and run small businesses. As the business grows, borrowers are able to increase their assets, protect themselves and families against risks, and ultimately gain self sufficiency.
Grameen believes an educated borrower is a successful borrower. Because habits of saving money take time to develop, Grameen has a required mandatory financial education program for borrowers. The instruction ensures an understanding of the microlending concept, associated interest rates and loan commitments.
Borrowers have access to financial resources, including licensing for small business, filing taxes, welfare and education issues. Borrowers each take 55 hours of financial literacy training per year.
All borrowers are required to open personal savings accounts at a local bank. The savings accounts are interest bearing, have no fees and no minimum balance. Once borrowers enter the program, they must contribute at least $2 each week to the savings account in addition to paying back the loan. Most deposit significantly more than the minimum. 
Borrowers are taught the importance of credit ratings, scores, reports, credit basics, how to improve credit, and how to obtain credit reports and scores. Participants who previously had no credit history, now average 670 in 7 months in the program.
The 5 person groups are organized into “centers” that have up to 8 groups each. These Centers meet weekly and are facilitated by Center Managers employed by Grameen America. These mandatory discussions help maintain focus and accountability. These new entrepreneurs also receive consultation from others with small business experience to maximize the chances of establishing a fully functioning venture.
Grameen America’s Program Success
In 2008, the year the first Grameen America office was put into operation, there were less then 500 borrowers and the total savings deposited were around $75,000. The program has enjoyed considerable growth since then. In 2010 there were more than 4500 borrowers and total savings exceeded $520,000. 
Because Grameen America is a relatively new organization, the metrics to quantify the full social and local economic impacts are still being developed.
By building on the successful model of Grameen Bank in Bangladesh, Grameen America has enjoyed a repayment rate greater than 99%. This compares to a default rate of 13% for credit cards  and 12% for micro loans backed by the U.S. Small Business Administration (average SBA backed micro loan from 2004 to 2008 is $13,000).  
The high percentage of loans being repaid reflects the idea that credit extended to the poorest populations can be financially profitable. In fact, new Grameen offices have been shown to be self-sustaining in 4 to 5 years.  With this payback time, commercial banks now contribute funding for new presences in cities of all sizes. 
When looking to the future, Grameen America intends to become a national, sustainable social business and recognizes the potential for microlending in all 50 states.
As of January 2011, a total of $13.6 million in loans have been dispersed in the United States since the program’s inception in 2008. 
Money received by Grameen is used efficiently as well. For every dollar received as a loan or donation, 85 cents goes to the programs. An additional two cents is put back into fundraising, and the remainder is paid out to management. This structure results in minimal waste and maximum effectiveness for every dollar received by the organization.
Microcredit in the United States is increasingly available to offer support to ideas that may result in small businesses and more self-employment. Microcredit lending provides a proven methodology to addressing the widening income gap.
As more small businesses have access to capital and consulting services, microlending has shown itself to be an effective way to improve the lives of individuals, families and communities of all sizes. As sustainable jobs are created, the nation’s economy builds upon a solid foundation.
Links to Similar Programs
New York based. Offers microcredit ranging from $750 to $12,000. http://www.projectenterprise.org/About/mission.html
Dallas Texas based. Combines entrepreneur training classes, support services, and micro-loans to start-up and existing businesses http://www.planfund.org/partners.html