What Poor Bangladesh Can Teach Rich America : Poverty: A $100 loan may not sound like much, but if you’re an ambitious entrepreneur, it can be a ladder to economic success.
In the last few years, the term Third World has sometimes become a synonym for American decline. But with the shift of global division from east- west to north-south, maybe it’s time to ask not what we can do for the Third World, but what it can do for us. While many insist that the rest of the world is becoming increasingly Americanized, America is, in some ways, becoming more like the rest of the world. We may find that we can learn from countries that have to solve their problems with fewer resources than we have.
Appropriately enough, one innovative approach to fighting poverty comes from one of the poorest countries in the world. For more than 15 years, Bangladesh has been one of the incubators of the microloan. Unlike most things in this world, microloans are exactly what they sound like--very small loans. Of course, size is in the eye of the beholder, and the $100 that will barely buy lunch for two on Wall Street can give a major boost to a street peddler in Dacca.
The Grameen Bank of Bangladesh gives microloans--often $50 or $100--to finance such home-based businesses as peanut frying, small-scale bookbinding and the peddling of matches, mirrors and jewelry. These businesses can mean the difference between having a tin roof instead of a thatched one. The bank and its work have won high praise in the West. In the late 1980s, the Ford Foundation arranged a series of exchanges between community-development workers in the United States and the Bangladesh bank. As a result, many U.S.-based efforts can trace their roots, either directly or obliquely, back to Grameen.
Naturally, loans tend to be a bit larger in the United States than in Bangladesh. While there is no uniform definition of a microloan, Bob Friedman, chairman of the Assn. for Enterprise Opportunity, an umbrella group for microenterprise programs, defines a microloan as a loan under $10,000 and most often under $5,000, with initial loans under $1,000.
Working independently of Grameen, a Cambridge, Mass., group called Accion International developed its own approach to microloans in South and Central America. Today, the largest amount of loans go to Colombia, Bolivia and Guatemala. When Accion decided to apply the same principles in the United States, they hired Delma Soto, an M.B.A. and former banker with Chemical and Citibank to run their pilot project in Williamsburg, Brooklyn.
One of Accion New York’s prize clients is Uvalda Alvarado, a 35-year-old Mexican immigrant who came to America in 1979. When Alvarado lost her job in a garment factory five years ago, she had trouble finding a new one. As the diminutive mother of four walked through her Brooklyn neighborhood, she noticed an vacant truck in a junkyard. After speaking with the junkyard’s manager, she cleaned up the truck and began selling tacos and other Mexican food out of it.
When a small space became available nearby, Alvarado turned it into a small restaurant, Antojitos Mexicanos 1 (Mexican Cravings). With the help of an initial $2,000 loan from Accion New York, she was able to pay off her freezer. She has used subsequent Accion loans to install a ventilation system, as working capital and to run a second restaurant in the neighborhood.
Since microloans are still only a small part of anti-poverty programs, hard numbers are difficult to come by. But a directory of microenterprise programs, published by the Self-Employment Learning Project of the Aspen Institute, lists 108 programs in 38 states. The aggregate of capital funds involved is approximately $38 million. The federal government has gotten involved, too: The Small Business Administration has budgeted $48 million for microloans and related grants over a two-year period. Clearly, the need is there.
Aside from making loans available to people who would otherwise never have access to bank credit, most microloan programs structure their loans in two ways to help the recipients enter into the economic mainstream. The first is called “stepping”: After a small loan is granted and repaid, additional loans are made. In this way, fledgling entrepreneurs gradually gain experience and slowly build up a credit history. Second, most microloan programs organize their clients into “peer groups” (Accion calls them “solidarity groups”) that take collective responsibility for the repayment of the loans. In a sense, the peer group acts as a substitute for collateral. At Accion, there are currently 13 solidarity groups with a total of 58 clients. The average loan is $1,200 per person, for a term of 4 months. So far, there have been no repayment problems.
Still, some believe the programs’ effectiveness is limited. Gary Kaplan is executive director of Jobs for Youth, a Boston-based program for inner-city youth. After experimenting for some time with entrepreneurship, he abandoned it as an anti-poverty tool. Kaplan points out that small businesses have a high rate of failure; in the meantime, already impoverished people have to pay their eat, pay rent and buy health insurance.
Kaplan acknowledges that the programs help some people, but “Entrepreneurship is not going to do anything about poverty or the growing disparity in this country between rich and poor.” For that reason, he says, these programs “are not a substitute for welfare, job training, education or anything else.”
Despite such reservations, the programs have attracted interest from organizations such as the Ford Foundation and the Charles Stewart Mott Foundation. And there does appear to be some evidence that the programs are helping the people they are supposed to serve. “The best programs show income increases of 15% to 30% after the second loan,” says Peggy Clark of the Aspen Institute.
Even those who strongly support such programs do not consider them a panacea. “For a small but significant percentage of the poverty population, self-employment is a serious opportunity and ought to be supported,” says Mary Houghton, president of Shorebank Corp. of Chicago, which supports several microloan programs. “It’s a strategy that might be appropriate for 10% to 15% of the population, absolute maximum.”
Accion’s Soto dreams of making the program self-sufficient, as some of the programs’ Latin American efforts are. She notes that although such programs typically charge interest rates of around 16%, the profit on small short-term loans is very small. She figured a net return of $13.39 on a $50 loan after three months.
One way of bridging the gap between Wall Street and the needs of local communities is through social investment funds like the Bethesda-based Calvert Group. Steve Schueth, vice president for socially responsible investing, says “We’ve learned you can’t just throw money at social problems. There has to be education, technical assistance, ongoing consultation with individuals.” After a recent survey of Calvert shareholders, the fund may be increasing the amount of its investment in such activities. Says Schueth, “It’s surprising how much benefit you can derive from a small amount of money.” But only if you spend it in the right way.
