The Microfinance Insider is a forum for graduate students engaged or interested in working in the field of microfinance. Through weekly posts and comments we hope to inspire students and foster the creation of a knowledge community of bloggers with a commitment to financial access and first hand industry information.

Monday, August 4, 2008

Adapting the Grameen Model to NYC

In a previous blog post I explored how domestic microfinance in New York City differs from microfinance in the developing world (see July 23rd post). In this post I would like to present the opposite perspective – how domestic microfinance can, in fact, look remarkably similar to its international counterpart.

Project Enterprise, a Harlem-based MFI, was established in 1996 as a New York version of the Grameen Bank. Founded by Nicholas Schatzi, a narrator for television documentaries and Debra Franlkin-Schatzi, managing director of M&K Financial Services, Project Enterprise was created to provide individuals excluded from the formal financial sector with access to capital and other financial services. After initially conceptualizing the idea of a Grameen-style MFI in New York City, the co-founders traveled to Bangladesh to visit the Grameen Bank and study its innovative lending practices. For the last twelve years, Project Enterprise has been working with the Grameen-style group-lending model to provide much needed microfinance services to low-income residents of New York City.

Today, Project Enterprise offers clients a variety of loan options. Its three basic programs are listed below:

1.) Peer Classic. The Peer Classic program is designed to serve entrepreneurs who have been in business for a year or less and lack the sufficient credit histories and/or collateral necessary to receive a traditional bank loan. Lending occurs on a group-basis, with groups being composed of four to six entrepreneurs. Initial loans start at $1,500, and can gradually increase to $12,000. In addition to loans, the Peer Classic program provides entrepreneurs with ongoing support and technical assistance.

2.) Fast Track. Fast Track loans are designed to provide capital to entrepreneurs who have been in business for one year or longer. With a group-based lending scheme, clients can initially borrow $3,000, and can subsequently borrow up to $12,000. The Fast Track program also provides clients with ongoing technical assistance, as well as networking opportunities.

3.) Direct Loans. This third loan program is directed toward entrepreneurs who have had three or more years of experience with formalized business operations. Loans start at $5,000 and can reach up to $12,000. This program differs from the previous program in that borrowers receive loans on an individual basis, rather than on a group one.

While the Direct Loan Program is similar to the individual-based lending programs provided by many other MFIs operating in New York City (see July 23rd and July 14th posts), the Peer Classic and Fast Track programs follow a different model – the group-lending model. I’d therefore like to spend some time exploring Project Enterprise’s first two loan programs.

Although they service different groups of entrepreneurs (Peer Classic loans are for less experienced entrepreneurs), the two programs are fundamentally similar. Individuals interested in either program must first register for a six-week training course that instructs them about PE’s lending process and imparts basic knowledge about how to start-up and run a business. About half-way through the course, participants form self-selected groups (of four to six members in the Peer Classic program, and six to ten members in the Fast Track program). Ten or so groups are then joined together to form a Center. A Center holds biweekly meetings to issue loans, collect repayments, review loan applications, and generally monitor the financial wellbeing of group members.

The formation of the group and the Center is an integral part of Project Enterprise’s Lending scheme. Group and Center members serve a variety of functions: Firstly, they behave as friends and advisors. They provide their peers with emotional support as well as financial advice, often assisting fellow group members with the development of a loan application or business plan. Secondly, group members function as loan officers. A completed loan request is initially submitted to the entire group for review. Group members must decide whether their peer is in a financially suitable position to receive a loan, and if so, whether the money requested is the optimal amount. Only after the entire group approves the loan request does the application get passed along to Project Enterprise staff members for review.

Thirdly, and most importantly, group members act as loan guarantees that replace the need for collateral. By making a group, rather than an individual, responsible for repayments, material collateral is rendered unnecessary because social pressure acts as the loan guarantee. Let me explain: Project Enterprise issues repeat loans to clients based on their repayment histories. These histories are composed of three factors – a client’s personal performance, his group members’ performances, and his Center’s performance as a whole. These factors have differing levels of importance, with individual performance mattering the most and Centers’ performances mattering the least. However, if any one borrower in each of these three sectors defaults, all of his group and Center members’ credit histories are negatively affected. This means that the amount of money that any client can receive in a subsequent loan is drastically lowered due to his fellow borrower’s behavior. In the group-lending scheme clients are reluctant to default because they know that if they do, not only themselves, but their peers as well will suffer as a result of their actions.

By adapting the Grameen-style group lending scheme, Project Enterprise has succeeded in reaching out to low-income residents of New York City in an innovative, effective and unique way. They have managed to eradicate the need for collateral as a loan guarantee and have therefore succeeded in providing basic financial services to those who would otherwise have to make due without. They have showed that there is not one single way to administer domestic microfinance services, but rather a myriad of effective methods that generate optimal results for low-income residents of the United States.


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