Microcredit for Americans: Can small loans help female entrepreneurs in Harlem?
On most Monday mornings at 9:45, twenty-five female business owners from Harlem, New York get together in a conference room at the Grameen America office on 125th Street for their weekly meeting.
Seated around pale white tables in a room with windows on one side and frosted glass walls on the other, all of the women have received small loans from Grameen America. A non-profit charity which provides loans starting at $2,000, the micro-lender aims to help low income female entrepreneurs who wish to start or expand a small business. The New York based lender is an off-shoot of the 2007 Nobel prize awardee, Grameen Bank, which pioneered the use of micro-finance as a tool for poverty alleviation in Bangladesh.
Grameen’s model rests on a simple idea: instead of giving people a donation, it’s better to help them access credit. The small ticket loans can help people start small businesses, which can possibly improve the recepient’s long-term well being if they take-off.
Members of the Harlem group run a mix of businesses such as salons, clothing stores, bakeries, a fitness studio, a theatre group and a local newspaper.
At a recent meeting as members sat down around the table, some of them passed their debit cards to Deyani Harris, Grameen’s Centre Manager for the group. As Harris began to punch in card details on her tablet to deduct their weekly loan installments, the group turned its attention to a member who was missing.
Seated at the head of the table, Sheila Black, reached the missing member on her cell phone and put her on the speaker. “Your payment for this week is missing,” said Black into the phone, as the woman on the other end explained that a family emergency had held her up.
“But you need to make your payments on time,” reiterated Black. Other members chipped in with their suggestions. “How about you come and hand over the money to me today in the afternoon?” said Pat Stevenson, who runs a local newspaper, Harlem News.
The woman agreed to meet Stevenson at her house to hand over the instalment. The phone call ended with a reminder from Black, “Make sure you give the full amount, your payment was short 45 cents last time.”
These groups are an important part of Grameen’s lending model. Even to get a loan, an applicant has to join a pre-existing group or find at least four other female business owners to form a new one. Before being approved for a loan, a member is required to attend at least 3 meetings and receive training on loans, savings and credit building.
Grameen America opened its first branch in Queens, New York in 2008 and has since expanded its operations to 15 cities in the United States. According to its website, as of last year it had disbursed over $1.2 Billion in micro-loans with an average loan size of $2,600.
Its loans carry an interest rate between 15 and 18 percent, which is quite high as compared to average rates for small business commercial loans (7.5%) , but slightly lower than what is charged on a credit card (18.5%). While the rates are on the higher side, the short repayment period of 6 months and weekly instalments keeps the interest affordable.
Dionne Davis, 46, has been receiving micro-loans from Grameen America for about 6 years. She uses them to run an online business for organic beauty products like lipsticks and nail polishes. The business supplements the income she earns from a day-job as an administrative assistant in a city hospital. On her $4000 loan the weekly interest payment is around $8–10, which she said, “is very low and makes the program manageable.”
While in its approach in Bangladesh, Grameen Bank required the groups to pay for a defaulting member, it has tweaked its model in the United States. Instead of requiring the group to cover for a member who does not make their payment, Grameen America holds the next round of individual loans contingent on the group’s overall repayment of loans.Thereby ensuring that members will encourage each other to pay their instalments because all of them want the next, bigger loan and no one wants to be left holding the bag on someone else’s loan.
Grameen America’s loans have an impressive repayment rate of 99 percent, which is an indicator of the effectiveness of its group lending model.
Small loans for a Harlem Fitness Studio
In a rented storefront at the National Black Theatre on 5th Avenue, Tineta Newton runs a pop-up fitness studio called EyeCycle. Twice a week she walks into the building’s storage area and drags out 7 slightly battered gym bikes for a group cycling class. Newton joined Grameen America in August 2018 after being denied a business loan by TD Bank because she did not have the required collateral.
Starting with the first loan of $1500, she has used the money to help pay the rent, get new fitness equipment and do some advertising. Newton started her career as fitness instructor in 2003, after losing her job as a research assistant at a recruiting firm in Midtown Manhattan. While working as an instructor at the Harlem YMCA, Newton began to experiment with “culture driven fitness programs” such as exercise routines set to Carribean, Soul music and choreography.
“The numbers increased at the gym and so did my paycheque,” said Newton, explaining how the early success made her more confident about starting her own venture. She formed her company in 2013, and signed a 3-year contract with the College of Mount Saint Vincent in The Bronx, for the positions of three instructors at their fitness facility, including herself.
After the contract ended, Newton leased a commercial space in The Bronx to start EyeCycle, an earlier branch of the business she now runs in Harlem. “I felt optimistic, people were liking the exercises and we were almost even on the cost,” said Newton. But the following year she had to shutter the doors of her fitness studio.
Separating from her husband put her in a financially dire situation. Unable to keep up with her mortgage payments, Newton filed for bankruptcy in October 2018. A few months later she was forcibly evicted from her home in East Bronx, as part of foreclosure proceedings. While she filed a claim for her belongings and wrongful eviction against the developer, it was dismissed by the Southern District Court of New York in October 2019.
“I knew come January it was about survival,” said Newton recounting how she took to selling thrift store clothing to earn some income. Landing a job as a trainer at the local Equinox fitness studio helped her get back on her feet, as she moved towards reopening her studio in Harlem with help from the Grameen loans. Newton now divides her time between fitness training for individual clients, spinning classes at the studio and selling thrift shop clothes.
She said that Grameen not only helped her out financially but also made her more focused and disciplined about her business. As part of the program she received training in managing business finances, website development and social media marketing.
Newton also feels that she has benefited from being in a group of like-minded people who run businesses of their own in the area. “It’s like a sisterhood,” said Newton, talking about how her peers have helped find new clients and events she can promote the business at.
While Newton admits that growth has been slow for her business, she also seems determined to keep going. “I keep looking for part-time work, overnight work or anything else because I know cannot depend on just one thing,” said Newton. Moving forward, she wants to hold more classes at her space in Harlem, get equipment to accommodate more clients and market the work-out leggings she has designed.
Micro-finance in the United States
Compared to the developing world, micro finance was slow to take root in the United States. Micro-lenders first appeared in the early 1990s. Accion International, a non-profit micro-lender from Venezuela, started its operations with a pilot program in Brooklyn, New York in 1991. Working Capital in Massachusetts and WEDCO in Minnesota also started running around the same time.
In an interview with the Rolling Stone magazine in 1992, Bill Clinton talked about how he was inspired by the work Grameen Bank had done in Bangladesh. “I think Muhammad Yunus should be given a Nobel Prize,” said Clinton, referring to Grameen’s founder.
In 1988, then the Governor of Arkansas, Clinton had helped establish the Good Faith Fund a micro-credit institution which followed the Grameen model. One of the earliest micro-credit providers in the United States, the fund was started after Muhammed Yunus visited Arkansas in 1986.
Micro-credit began to pick up in the United States when Congress reformed the Community Reinvestment Act (CRA) in 1995. The law encouraged commercial banks to meet the needs of borrowers in moderate and low-income neighborhoods.
Under the U.S. legal system, “if you’re a CitiBank or Chase, or Bank of America, you must every year send a significant amount of money to Community Development Financial Institutions (CDFIs),” said Suresh Sunderesan, Professor of Financial Institutions at the Columbia Business School.
Micro finance institutions in the United States, including Grameen America and Accion International, charter themselves as CDFIs and hence receive capital from loans and grants made by commercial banks. On its website, Grameen America lists Capital One, BNP Paribas and, Wells Fargo among its lending partners.
Many micro-lenders that were functional in the 2000s, have either remained small or have faded away. On the other hand, Grameen America has constantly expanded its network and is now the largest micro-lender in the United States, according to the volume of loans made. As of 2018, the second largest micro finance provider Accion USA, has disbursed $40 Million in loans as compared to Grameen’s disbursed amount of over a billion dollars in the the United States.
Solving Poverty in the Developing World
While the initial promise of micro finance as the silver bullet against poverty in the developing world, attracted the attention of developmental economists around the globe, recent studies have raised questions on its effectiveness. Reports of predatory lending and harassment from debt collectors have also attracted criticism.
Six studies, using randomised control trials, on the impact of micro finance on poverty were conducted by economists in Bosnia, Ethopia, India, Mexico, Morocco and Mongolia between 2003 and 2012.
In India, MIT Economists Abhijit V Banerjee and Esther Duflo found that access to micro finance in a slum in Hyderabad, India had little or no positive impact on raising household incomes, and there was little evidence to support that micro-credit was empowering female borrowers. “While microcredit succeeds in leading some of them (the loan recipients) to expand their businesses, it does not appear to fuel an escape from poverty,” wrote Banerjee and Duflo in their study.
The trials in other countries also yielded results consistent with Banerjee and Duflo’s study, with the studies in Bosnia, Morocco and Mexico finding a slight positive impact micro-finance had on the time recipients devoted to their business.
On the flip side, a recent report by the Economist illustrates how instead of helping people build businesses micro-loans have drive women down a debt trap in northern Sri Lanka. While the idea to spur entrepreneurship in a war ravaged area by giving out small loans sounds promising, when those loans are spent on daily needs or if businesses fail, the high interest rates and frequent repayments can be crippling.
High interest rates have also been at the centre of an indebtedness crisis currently brewing in the Indian state of Assam, according to a report by Scroll. The report also takes note of how an endless cycle of debt has meant that some women have had to sell their land, cows and other assets, just to cover the installments.
A strong majority of academic work and media reports on the impact of micro finance have shown how its lofty promises have fallen flat. While micro-finance does not solve poverty, it may help low income households by helping some of them build independent businesses. It is a tool that can be employed to help people fight poverty but in the absence of structural changes, poverty is too complex a problem to be solved with one bullet.
Using a model similar to the Banarjee and Duflo study, a social policy research group MDRC is currently studying the impact of Grameen America’s micro-lending on borrowers in New Jersey. Early results from the study, published in March 2019, stated that recipients of a Grameen Micro-loan were more likely to run a business of their own and were less likely to run out of money, as compared to a group that did not receive the loans.
While the studies use similar research models, it is important to bear in mind the differences between populations that micro-finance caters to in the developing world, as compared to the United States. “A lot of clients of micro finance (here) are the working poor, they already have some income when they take these loans,” said Chi-Kan Richard Hung, Associate Professor of economic development at University of Massachusetts, Boston.
Of the 1,492 women included in the MDRC study, half run their businesses as a way to supplement their income from a day job. Therefore instead of working as a targeted solution against poverty, micro credit in the United States is more of a “useful tool as an alternative source of finance for low income households,” said Richard Hung.
A third of the participants in the study also indicated that they intended to or were operating direct selling businesses like Avon, Jafra, Mary Kay and Herbalife. Although these Multi-level Marketing scheme firms often promise a dream life a good income, they can also significantly harm the seller’s financial situation.
“Grameen America does not encourage nor advise its borrowers to use their microloans towards multi-level marketing programs,” said Macus Berkowitz, Vice President of Technology & Innovation at Grameen America, in an interview with Next Billion while discussing results from the study.
Sustainable Credit or Layers of Debt?
Seated on the passenger seat of her U-Haul truck, Sheila Black narrates how she first raised $10,000 on Kiva, a non-profit crowdfunding platform for small loans, to buy the truck and convert it into a moveable women’s clothing and accessories store. Then using her loan from Grameen America, she expanded her inventory in order to attract more customers.
On most days, Black parks her truck in front of a shuttered Duane Reade near Apollo Theatre on 125th street with the hope of attracting foot-traffic customers. Running a business that can slow down due to three days of heavy rain can be tricky when there are weekly payments to make. “While most times I am able to pay, sometimes it’s hard to keep up. Then I borrow money from my son or daughter to pay the installment,” said Black.
Instead of a collateral requirement or credit history checks, Grameen relies on group members to asses whether an applicant should be admitted and consequently given a loan. “You don’t invite someone unless you trust them,” said Tina Lee Jones, a Grameen member, explaining how the groups decides whether to admit a new member. Jones is a motivational speaker and author, who uses loans from both Kiva and Grameen America to buy supplies for her business.
When asked about how one could check someone’s financial well-being before accepting them into a loan group, Jones said, “You know based on their character. How you handle your personal finances also says a lot.”
Although Grameen does not check credit scores before giving out loans, it does help members build their credit scores by reporting the loan repayments to Experian and Equifax. This can be quite useful for female business owners who wish to access bigger commercial loans, but are unable to due to a damaged credit rating.
The one thing loan recipients from Grameen America noted most often, was how being part of a group and the weekly payment schedule had helped them instil a sense of discipline into their work.
Back at the Monday meeting of the Harlem group, members passed each other pencils and task-sheets with questions on small goals for their businesses and how they planned to accomplish them. The Grameen representative, Deyani Harris, explained that they had two minutes to fill-up the sheet and then they would go around the table and discuss their answers.
“My goal for my business is to get audited,” said Pat Stevenson, adding that getting an audit would help her expand the business by monitoring the money better. Stevenson has been a Grameen loan recipient for three years, and has used the money to build an online presence for her newspaper. Timia Hunt runs a clothing store in Harlem, and said that her goal was to get a team of four make-up artists for a show she was participating in next month.
“I need to fully update my portfolio, and get printed material I can send to clients,” said Hazel Smith, a playwright and owner of a stage production company based in Harlem. Other members went through the answers on their sheets as well, talking about goals like getting a meeting with a state legislator, developing a new recipe, making more social media videos for their business and hiring interns.
At the end of the process, Harris said that they would be doing this every week now and that they should think about more specific goals for their businesses. “The idea is also for you to connect and help each other out, so that you can all be on the same page,” said Harris.
“It did help me out. When I said I needed make-up artists, these two ladies told me they might know someone who could do that for me,” responded Timia Hunt, referring to the members seated next to her. “I just sent a text to a friend to ask if her daughter’s still involved in make-up styling,” added Pat Stevenson.
Stevenson also offered a few more more suggestions to other members, like asking one of them look up a list of black stores she could market her clothes to and talking about an opportunity that had opened up at catering place she knew about, for those interested in the food business.
Harris said that this was an example of what the exercise was aimed and they need to cooperate more so they can pull each other up. “That is the purpose of us joining Grameen, if it wasn’t we’d be at a Bank of America,” she added.
As the meeting winded down and members began to exit the room, Sheila Black waved a bundle of notes and in the air and said, “Are we still holding on to the money we collected for Kay’s missed instalment?” A few members nodded, and one said that it would be a good idea to keep it till they got the payment from her in the afternoon.
According to its 2018 annual report, Grameen America has a target to expand to 40 US cities and disburse $12 Billion in loans over the next decade. While Grameen America has so far overcome the challenges of adopting its model to the local economy and scaling its operations, a measure of its success would also to see how many sustainable businesses its loans can help create.
Since micro-finance institutions largely target populations that lack access to affordable credit, it’ll be interesting to see if micro-lenders, especially non-profit CDFIs like Grameen, are able to fill the credit gaps that have persisted in the United States since the Great Depression.
Grameen America turned down multiple requests for comment and declined to answer emailed questions regarding the story.