Recession-proof banking?

NEW YORK-There he was-silver-haired and in a Bengali tunic-arguably the most popular banker of the year in New York City. As soon as he stepped out on the street in Queens, vendors at an outdoor market abandoned their wares-necklaces, a cart of Italian ice, rice pudding, and yards and yards of saris-to get a picture with him and shake his hand. Muhammad Yunus, the 2006 Nobel Peace Prize winner for his development of a microfinance model that has spread around the world, is as famous as a rock star among Asians just about anywhere. He offered high fives and hugs in return.

Yunus, who turns 69 this month, brought his revolutionary model to New York just over a year ago. Grameen America, a microfinance bank that provides loans to low-income entrepreneurs, is "banking for the unbanked" as its slogan goes.

"And ka-ching I take your money . . ." boomed a stereo system out over the crowd playing "Paper Planes" by Sri Lankan rapper M.I.A.

This is not a good year to be in the credit industry-unless you are Yunus. His U.S. bank has distributed $1.5 million in loans to small business owners in its first year while enjoying a 99.5 percent repayment rate. Yunus has said "you need a dollar to earn a dollar," and Grameen offers the first dollar-tiny loans that the poor can repay and build their own businesses, one week at a time.

Right now, Grameen America is a small operation, with only 600 borrowers. But the success of the last year in the midst of a credit meltdown has encouraged its staff to expand the business, recently opening another hub in Omaha, Neb., citing high demand from the strong immigrant community in South Omaha. Grameen is also looking to open other branches in Boston and Fayetteville, N.C. Grameen America president Vidar Jorgensen has said the bank hopes to operate in all 50 states.

"In three years it should grow to 50,000 [borrowers]," said Yunus. Then shrugging his shoulders, he asks, "Why not?"

Yunus began the Grameen Bank in Bangladesh in 1976, offering small loans (microcredit) to entrepreneurial low-income women. The model was profitable and showed evidence it could create jobs, pulling families out of poverty. It spread to villages around the country, generating $155 million a year in revenue by 2006, and blossoming into offshoot businesses around the world. But the bank gained little recognition until Yunus won the Nobel.

In 2008, Grameen planted itself in New York City, the financial capital of the world, raising eyebrows among many in microfinance. Few thought it would succeed, and some doubted that it was needed. First, the U.S. credit system is a labyrinth compared to the informal systems in Bengali villages. Second, banking experts scoffed at a financial institution from the developing world coming to the developed-especially with Bengalis saying they would have a profitable bank in the city in five years. Even in April at Grameen America's one-year anniversary, one reporter described the Grameen operation as "Third World"-a term that denotes dependency or underdevelopment-drawing a forbearing protest from Yunus. "It's not a Third World bank," said Yunus. "It's a good bank."

Along with the challenges in perception, microfinancing in the United States faces real cultural challenges: The model relies on group accountability for repayment, and most Americans would like to be left alone with their finances. The individualism pervading American culture, experts said, would suffocate the program.

And it still might. I stood in the street market and asked Shah Newaz, one of Yunus' right-hand men and the director of the Queens program, how he works in an individualistic-but he interrupted before I finished. "That is our struggle," he said, nodding his head and closing his eyes. He first came to the United States in 2006 from a Grameen project in the Dominican Republic. "In Latin America and Asia they have a community of generation after generation. People here-they don't know the people living next door."

Microfinance relies on community peer pressure for loan repayment. The bank makes loans to people in groups of five. Borrowers don't need a bank account, credit history, or collateral, but they must live near other members of their loan group, and meetings of the group coincide with weekly loan payments. Grameen staff members invade the lives of group members, getting to know their businesses and their children-in effect, becoming part of the family.

Borrowers receive loans of anywhere from $400 to $4,000, and Grameen requires that they save at least $2 a week in addition to making their loan payments. Before the financial crisis unleashed its full force, clients were usually saving more, but Newaz said now they are saving closer to the minimum. That means they've found a way to beat the credit crisis-but have they found a way to beat a recession's low spending that has crushed many small businesses?

Grameen leaves that to the borrower's own innovation. Zennia Shoffner, a borrower who has started a catering business in Jackson Heights, said her business is steaming along: "People are always gonna eat." Her peach cobbler, customers quickly discover, is worth paying for.

Shoffner is one of the few vendors who speak English; most are recent immigrants and offer testimonies in Spanish or Bengali. Most are women, and that's part of the original Grameen model. Women statistically are better at long-range planning and are more likely to repay loans. With women comprising 97 percent of its borrowers, Grameen Bank has helped transform Bengali society, giving women the freedom to be entrepreneurs-but it took time to get women to even accept loans.

The Bengali program also teaches certain lifestyles that the bank leaders see as core to development: Living in repaired houses, using clean and proper latrines, and drinking clean water. Growing one's own food and eating plenty of vegetables, investing, helping those in need, planning for smaller families, and educating one's children also are part of the lifestyle transformation, as is doing away with dowries and child marriage. Those principles don't necessarily translate to Queens, but staff hope the group accountability will.

"You've got to give the Grameen Bank credit," said Craig Cole of the Christian microcredit organization Five Talents. "You're able to see the whole human being being developed-not just the financial part."

But in past years a few have poked holes in Grameen's apparently successful model, saying the bank is inflating its repayment numbers by allowing borrowers to defer payments for up to two years before counting them as delinquent. Technically, small payments are due in the weekly meetings.

"We see no reason why the sky should fall on anybody's head because a borrower took longer time to pay back her loan," wrote Yunus when he introduced new rules for the bank in 2002 following a difficult business cycle. "Since she is paying additional interest for the extra time, where is the problem? We always advocated that microcredit programs should not fall into the logical trap of the conventional banking and start looking at their borrowers as some kind of 'time-bombs' who are ticking away and waiting to create big trouble on pre-fixed dates."

The average annual interest rate on Grameen loans is high too, at 30 percent, which Grameen defends as the cost of doing business when they offer small loans and weekly meetings with staff. In Bangladesh the bank's profit margin is indeed razor thin.

Grameen America faces its own credit problem: The bank needs capital to meet the demand for its services. While Newaz says the bank is on track to being unsubsidized and financially viable in four years, administrative difficulties could hamstring their business plan. (Grameen currently receives support from foundations and individual donations.) In Bangladesh, 70 percent of capital comes from borrowers' savings, but in the United States, Grameen hasn't been approved as an official bank yet, so it can't access its clients' savings. (Most U.S. micro-credit groups don't have a bank charter; they're nonprofits.)

That creates even more problems because the Federal Reserve will not approve Grameen to be a bank until it has a hefty percentage of capital. Also, the process to obtain a charter as an American bank is itself a big task for small operations like Grameen America. It must file extensive paperwork documenting every detail of the company-from the credit history of each director on the board to the number of shares available for the bank. Access to capital, said Grameen America's CEO Steven Vogel, is "the biggest obstacle." Top staff of the bank have met with Obama administration officials to talk about the issue.

In different forms, there are others in the United States already doing what Grameen America is doing. ShoreBank, a bank that provides mortgages to low-income individuals, has served Chicago since 1973 and expanded to a half dozen U.S. cities. ACCION International has loaned a total of $214 million in microfinance in the United States since 1991. Smaller microenterprise groups dot the country, too. REAP is involved in microlending in rural areas of Nebraska, providing up to $35,000 to entrepreneurs. Eighty-six percent of businesses in the state are microenterprise-sized, according to the program's director Jeff Reynolds, but the model is "at the bottom of the food chain" in the United States.

"Microenterprise will never be sustainable by itself without funding, if you're going to do hand-holding," said Reynolds, pointing out that counseling and group involvement are essential to the success of microlending-and expensive. REAP relies mainly on government grants. "It's really helpful when you have an administration that believes in what you're doing," he said.

In 1986 with then-Gov. Bill Clinton, Yunus helped begin an Arkansas program, which morphed away from the Grameen model over the years but is still in existence as the Southern Good Faith Fund. That taught Yunus the difference between the banking environment in Asia and America: One woman told him she wanted a loan to raise puppies and sell them, a business idea that was entirely foreign to him.

Some entrepreneurs are taking loans to help their communities. With a Grameen loan, Daphne Williams of Harlem has started her own publishing company, Drinking Gourd, after the constellation that "slaves followed to freedom," she explained. Beyond publishing children's literature, her business will teach children from Harlem how to write and make films. Williams just celebrated getting Drinking Gourd's new business license. "It'll be all over New York," she said. She keeps the paper ledger documenting her loans and her payments tucked in her shirt.

Though Grameen America has thrived, globally microcredit is stagnating, with some markets drying up. Five Talents' Cole described one woman in Peru who lost clients for her embroidery in Germany and France as Europeans tightened their spending. Despite the hard times, he thinks microcredit is one of the central avenues out of poverty. "Business is the best way to create jobs," he said. "Not through government. To me, free market job creation is what gets people out of poverty."

Unsurprisingly, Yunus thinks microcredit is the solution to the recession, too. He thinks the whole credit system should be rebuilt to run on some of the rules that govern microfinance: "We have to learn from all this." According to the U.S. Federal Reserve, 28 million people in the United States do not have bank accounts, and the alternatives are often check-to-cash services, the costs of which can be exorbitant.

President Barack Obama announced a $100 million microfinance fund in April, which Yunus said was a pittance, but a "first step." USAID already provides some funds for microfinance operations in the developing world, averaging about $100 million a year. Now Congress has a bill under consideration to provide low-income Americans with financial assets through individual development accounts (IDAs), another microfinance tool.

"Today's financial system excludes many people," Yunus said. His hope is that "people will be let into the system."