Page last updated at 22:36 GMT, Thursday, 7 May 2009 23:36 UK

Small loans lead to big returns

By Salim Rizvi
New York

Grameen Bank borrowers' fair in New York
Grameen America lends money to people who have no credit history

Tahmina Maya is a 45-year-old New York woman of modest means.

But in the past 12 months, she has been able to get a loan to start a business and make the regular weekly repayments on time, while many Americans are struggling to pay off mortgages and credit card debts.

And she's not the only one.

Despite the ravages of the global financial crisis, one bank in the Big Apple, Grameen America, has been making its mark with a business model that specifically aims to help the least fortunate.

And while its rivals struggle with the consequences of sub-prime mortgage lending, Grameen America stands out with a loan repayment rate of more than 99%.

Tahmina came to the US from Bangladesh 11 years ago. After her husband died three years ago, she had to struggle to bring up her two children.

A year ago, she took her first loan of $3,000 from Grameen America bank to start a small clothing and ornaments business. Now she has taken two loans of $3,000 and has been repaying the loan instalments on time every week, as well as taking care of the family.

"I am so thankful to Grameen America bank that has lent me money to start this business," says Tahmina.

"Now I am able to repay on a weekly basis and also take care of my family expenses. My business is doing well and I will take more loans from Grameen America bank to grow my business."

Trusting the poor

Grameen means rural in the Hindi and Bengali languages. Professor Mohammad Yunus, an economist, started the Grameen Bank project in Bangladesh in 1976.

Prof Yunus says his bank has not been affected by the global downturn: "Micro-credit has been one area where there has been no impact of the current banking crisis. It is still as robust as ever."

The Grameen bank believes these small loans could not only lift people out of poverty, but also serve as a sound investment practice.

Professor Muhammad Yunus
Professor Yunus has pioneered banking initiatives for the poor

"The micro-credit system will play an important role in the recovery process, because people are losing jobs and the banks are not giving loans. The micro-credit system will help in creating self-employment by giving small loans, which in turn will help the economy," says Prof Yunus.

It is a simple idea: give small amounts of credit to poor people to start their own businesses and they repay the loans.

But the bank gives credit to people who have no credit history and no guarantors.

The credit is given solely on trust. And it has been helping millions of poor people eke out a living in Bangladesh for more than three decades now.

For its huge success in Bangladesh, Prof Yunus and the Grameen Bank were awarded the Nobel Peace Prize in 2006.

In January 2008, the bank opened its first branch, Grameen America, in the Jackson Heights area of Queens in New York. In its first year, it lent a total of $1.5m to more than 700 people.

To get loans from this bank, borrowers must have two forms of identification and an income tax return to verify that they are below the poverty line, which is an annual household income of about $21,000 for a family of four.

The loan is given to start a small business or grow an existing business.

Savings plus loans

Every new borrower has to join a group of five people, who have to meet a bank official every week to discuss money management skills and also make their loan repayments. If one person defaults on a loan, no-one in the group will be eligible for a new loan.

The loans are given at the fixed rate of 15% and the amount ranges from $250 to $3,000. As the loans are repaid, more loans can be taken, up to a limit of $25,000.

The borrowers must also open up a savings account with Grameen America and deposit at least $2 a week to cultivate saving habits. In the first year, about 600 borrowers deposited more than $80,000 in savings accounts.

Grameen Bank borrowers' fair in New York
Many women have benefited from Grameen's lending policy

Although the loans were made only with simple receipts, 99.5% were repaid on time.

These borrowers had no credit history until they came to the Grameen Bank. Now, with the current loan payment practices, they can expect a credit score of 650 or higher within a year. Soon they may be eligible to get loans from mainstream banks in larger amounts.

Borrowers are mostly immigrants from Latin America, South Asia and also African-Americans.

Most of them only speak in their native language. So the bank has employed multilingual staff.

"We start with a training process for a week, during which borrowers are told, in the language they speak, about the rules and regulations of the loan process," says Grameen America's project manager Noor Shams.

"After that, they are also given an oral exam, to ensure that they fully understand the Grameen programme."

The clients, mostly women, borrow money to start small businesses selling clothes, food items, ornaments and beauty products. Some work from their homes, while others have opened shops across the borough of Queens.

Working from home

Liliana Cuji, 40, is originally from Ecuador. She came to the US 18 years ago. She used to work in a beauty salon, which also involved going from home to home to give manicures and pedicures.

Liliana is bringing up two school-age sons all alone, as her husband no longer lives with her. She says it has been a struggle putting food on the table.

This year in January, one of her friends advised her to approach the Grameen America bank. She took out an initial loan of $1,500.

With the loan money, she started her own small business selling beauty products. She is full of gratitude for the opportunity the bank has given her.

"I am doing well with my business and am also paying the bank on time," she says. "I have been through very hard times before I took a loan from this bank."

Liliana runs her business from her home, which gives her time to look after her children too. She calls up her customers, mostly contacts made during her stints at beauty salons. She also visits some beauty salons to sell her products.

Barack Obama
Barack Obama also backs microfinance

Grameen Bank officials believe that reducing poverty through microfinance banking is not just for developing economies.

Recently, US President Barack Obama also created a $100m microfinance growth fund for small lenders. Though a good first step, it is still considered a small amount. Grameen Bank in Bangladesh spends $100m on microfinance every month.

Currently, Grameen America depends on donations and payments on existing loans. But the bank is planning to apply for a credit-union licence, which will allow it to accept bigger deposits from US customers. The bank plans to use those deposits for granting more loans to thousands of people.

Now the bank is expanding to other areas in the US. Soon a branch will open in Brooklyn and plans include branches in states such as Nebraska and Ohio.

Branches of the Grameen Bank are already operating in several other countries, including Turkey, Indonesia, Costa Rica, Kosovo and Zambia.

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