With Jennifer Kampe
This year, Silicon Valley Bank, an investment bank whose clientele includes high-tech startups, life-science corporations, and premium vintners, expanded its operations to include a new class of clients: street vendors. Thanks in large part to a one million dollar partnership between SVB and Grameen America, Northern California borrowers below the federal poverty line - primarily women, typically street merchants and home-based producers of food and trinkets - will now have access to the Grameen Bank's pioneering micro-financial services. Three months since that announcement, preparations for the Bay Area branch are still underway. Meanwhile, this April, GA issued a press release announcing that it had secured financial support for its next branch to be located in Washington, D.C. Though an undeniable boon to some borrowers, it remains to be seen if GA's promise of a micro solution will scratch the surface of this country's macro problems - or if it will merely distract from structural reform.
Launched in Queens, New York in 2008, Grameen America is one of many recent attempts to replicate the success of Muhammad Yunus' Nobel Prize winning Grameen Bank in the developed world. Grameen Bank's model of group lending replaces the profit-driven model of traditional banks with a nonprofit mantra of poverty relief, where loan-worthiness is determined on the basis of local knowledge rather than formal credit histories.
Yunus' model of collateral free group lending has been lifted, more or less intact from Bangladesh to America. In the United States, the terms for a basic loan are as follows: Borrowers form groups of five members, and each receives a first time loan from $1500 to $2000. These groups form the foundation of the Grameen Bank's principles - Grameen means "of the village" in Bengali - and continued loans are contingent upon members of the group policing and supporting themselves. If one person defaults the whole group will be ineligible for future loans.
Thus far, Grameen America has reached over 2000 borrowers with an effective 98% repayment rate, according to their own reports. This is impressive, but ignores the most trenchant effect of the bank's efforts: the creation of a social support network for some of America's most vulnerable citizens. As one borrower explains, "their interest is in developing women workers...Women share their ideas and help each other out."
Despite the difficulties of self-employment, traditional wage labor may be a distant second-best for Grameen's borrowers. For single mothers, home-based production means not having to choose between their families and their job. According to a recent report of the US Census Bureau, 27% of custodial single mothers and their children lived below the poverty line in 2007. In increasing the productivity and income stability of one of America's most vulnerable groups, Grameen provides a great service.
For struggling micro-entrepreneurs, credit may be necessary, but it is not itself sufficient for success. Vijay Mahajan, chairman of the Indian livelihood promotion institute BASIX, explains that micro-entrepreneurs also need a network of complementary services: "identification of livelihood opportunities ... business and technical training, establishing of market linkages for inputs and outputs, common infrastructure and some times regulatory approvals". Unfortunately, excitement over microfinance may crowd out programs which tackle these needs, undermining the programs which are a precondition for its success.
In a 2008 article "The Limits of Microcredit - A Bangladesh Case," Jason Cons and Kasia Paproki document the crowding-out of non-credit NGO's in the microfinance-saturated village of Arampur, Bangladesh: "Not only are many new NGOs forming specifically to deliver microcredit, but other organizations are increasingly shifting their funding away from social safety net programs and towards microfinance. This has led to a marked reduction in the diversity of services available in rural areas."
This finding is particularly troubling when we consider that in the United States, the package of complementary services and reforms necessary to empower micro-entrepreneurs is leviathan.
To understand the scope of Grameen America's efforts, you have to look at trends in the employment of micro-entrepreneurs - classified by the Bureau of Labor Statistics as the non-incorporated self-employed. While the informal self-employed make up nearly one-third of non-agricultural employment worldwide, the highly competitive, corporate culture of the US economy is particularly inhospitable to low-skill micro-entrepreneurs. In the United States self-employment has fallen steadily since the 1940s; as a share of non-agricultural employment, self-employment has been halved in the last 60 years. While this decline can be attributed in part to the increasing use of legal incorporation (which re-classifies the self-employed as wage/salary workers), it also tells the story of a shrinking niche for low-skill level micro-entrepreneurs. In 2009, just 6.8% of workers were classified as non-incorporated self-employed. In that small share, the professional self-employed - primarily white males, retired salary workers, and current construction workers - significantly outweighed Grameen's targeted female street vendors. Self-employed women below the poverty line amounted to just under 0.3% of total employment - or around 386,000 people .
What does this mean for Grameen America's new efforts? It means over 85% of the working poor depend on the quality of wage and salary employment in this country . For this group, the issue is not a simple credit market failure, but a much larger failure of the labor market to generate a living wage. A strategy which covers small and medium enterprises is more suited to the economy of the US and to a much larger segment of the working poor. Medium sized enterprises are better capable of absorbing risk, creating linkages with other local businesses, and providing employment. However, programs supporting such enterprises are typically limited to tax breaks, while credit for such firms remains tight. Micro-entrepreneurs, especially with the help of Grameen America, may eke out a living in America's corporate culture, but they will never grow large enough to threaten any established firms. To a small but highly vulnerable segment of the population for which traditional wage labor is not an option, Grameen America is a blessing. If the bank maintains its focus on micro-entrepreneurs without providing complementary services to increase both the entrepreneurial capacity of borrowers and the demand for their services, Grameen's efforts may never dent poverty in the US. More troublesome though, the growing presence of microfinance in the US may displace funding for non-credit NGOs as it did in Bangladesh. Zeal for this new silver bullet distracts donors and policymakers alike from the need for equity-enhancing institutional change, investment in long run economic growth. And ultimately, it distracts us from the government's failure to protect the working poor.