last modified: Friday, December 16, 2005 0:31 AM
Peer Lending in the United States: Experiences, Complications, and Possible Re-envisionings
Note: This is the second installment of a three-part series on group lending internationally, domestically, and in New Orleans.
Part One - Group Lending: Learning From the International Experience, can
be accessed here.
Part Three - Group Lending and Its Applicability to a Post-Katrina New Orleans, can be accessed here.
The success of the group lending model in Bangladesh and elsewhere in the developing world encouraged U.S.-based lenders to adopt the model wholesale. However, the decade-long American microlending experiment has proven that the Grameen model cannot simply be duplicated in the United States; it must be translated to the American context. Most American microlenders have adjusted to this reality by ceasing to offer group lending programs. Instead, they have concentrated on providing job training and individual microloans. However, in this entry I will argue that the possibilities for a uniquely American variant of group lending have not been fully explored, and that there remains room for innovative models that capitalize on the inherent advantages of the group lending model while adopting the technique to the American context.
This entry will examine the limitations of applying the original group lending model literally in the United States and evaluate the ways in which the group lending model has been fine-tuned to accommodate the uniquely American context.
Researchers have identified several problems with applying microlending in the United States. These include the following:
The disappointing outcomes of American group lending experiments have been attributed to the following:
The Experience of American Group-Lenders: Trial and Error
Over the past ten years most American group lending models have reached far smaller audiences than they anticipated, and have suffered far greater default rates than their counterparts in the developing world. Because of the inherent limitations enumerated above, most lenders were not able to achieve the institutional efficiencies on which peer-lending depends, and even after a decade of lending, virtually none are self-sufficient.
In response to this reality most American microlenders, Accion USA among them, have shifted their focus away from group lending and towards individual lending and entrepreneurial training and support. Currently, only twenty percent of microlenders offer group lending programs. Some, however, have attempted to adapt the group lending model to the American context. Some examples are detailed below.
Tying group lending to intensive job training. This policy has several benefits: it increases the business skills of borrowers, and can subsidize the lending side of microenterprise organizations (programs often charge fees for training). Also, using mandatory training as a condition for loans may act as a self-screening mechanism that improves administrative efficiency: only truly committed entrepreneurs will be willing to pay for and undergo training. Lastly, intensive training programs that predate the formation of borrowing groups may create bonds between strangers that approximate the close ties of mutual obligation in developing world borrowing circles.
For example, Women Entrepreneurs of Baltimore (WEB) runs a highly intensive, highly selective, twelve week training program that enrolls only thirty out of 150 applicants, requires 108 hours of class work, and offers access to mentoring, networks, and funds. WEB participants choose their borrowing groups upon completion of the training program, and anecdotal evidence suggests that the stringency of the program creates exceedingly strong bonds between the women. This is supported by WEB's track record: a 100% repayment rate on its participants' loans. See: www.webinc.org
Tying peer-lending to savings, especially Individual Development Accounts (IDAs). Requiring participating borrowers to save some of their income provides a cushion for potential economic downturns, as well as more fully immersing participants in the fiscal system and instilling financial discipline. IDAs, which provide matching funds to deposited savings earmarked for buying a house, education, or starting a business, are particularly useful tools.
see: Individual Development Accounts: Policies to Build Savings and Assets for the Poor, Ray Boshara, March 2005, WR&B Brief #32, Brookings Institution, www.brookings.edu
Some peer lenders also require that groups set up a small loss reserve before they can access loans. For example, Rural Enterprise Assistance Project in Nebraska (REAP) requires each group to create its own Local Loan Loss Reserve (LLR) of $500 to $2,500. This policy has several benefits. It acts as a prescreening device to insure that only the most committed entrepreneurs will access loans, and makes the threat of default more real to borrowers. It also provides a safety net that can be tapped in case of default.
Tapping the potential of preexisting community organizations. Working Capital, a New England-based group lender, provides a good model for partnering with preexisting community groups. Regional offices of Working Capital recruit local business councils, non-profits, community development corporations, and housing agencies to serve as ‘community partners'. These partners oversee local programs and recruit "Enterprise Agents" who organize peer groups in their community.
See: Microfinance in the United States: The Working Capital Experience- Ten Years of Lending and Learning, Jeffrey Ashe, Fall 2000. Journal of Microfinance, Volume 2, Number 2.
Returning to more traditional lending techniques to reduce default rates. Even within the framework of a group lending model, some lenders have found it necessary to institute more traditional banking procedures to lower their default rates to reasonable levels. For example, the Good Faith Fund in Southern Arkansas decided, after a period of running standard group programs that suffered from high default rates and borrower fraud, to require credit checks and collateral and to pay loans directly to the stated recipient rather the borrower himself. The Fund also lowered the amount of the initial loans available to groups on the understanding that credit lines would increase upon repayment. These modifications proved successful in reducing default and fraud rates.
See: Making the Adaptation Across Cultures and Societies: A Report on an Attempt to Clone the Grameen Bank in Southern Arkansas, Richard Taub, Summer 1998, Journal of Developmental Entrepreneurship, Volume 3, Number 1.
Shifting the focus of group lending programs to networking rather than loan recovery. Some lenders emphasize the importance of peer groups as business support groups. For example, Project Enterprise in New York hosts bimonthly ‘Center Dinners' that bring together their smaller lending groups. The dinners provide a forum in which participants can let other businesspeople know about their services and products, share strategies, and feel connected to a larger community of entrepreneurs. See: www.projectenterprise.org.
Targeting programs to local populations. Group lenders who place a great priority on flexibility and local adaptability have generally proven more successful than more doctrinaire organizations. For example, Community Capital Works (CCW), an arm of the Philadelphia Development Partnership, has specifically tailored a lending program to the city's Muslim population. The resulting lending circle, the People's Business Loan Group, accommodates the tenet that Muslim business owners cannot pay interest on a business loan. CCW offers the group interest-free loans but charges training and processing fees to cover costs. This compromise, which was developed through close collaboration with the Muslim community, begins to illustrate the breadth of forms that group lending programs can assume.
The Appropriate Context for American Group Lending
American group lending will succeed best in urban areas with high concentrations of buyers, sellers, and potential entrepreneurs. Cities or communities with high levels of social capital (in particular, immigrant communities and close-knit neighborhoods) will prove more amenable to the group lending model. Cities that have strong, preexisting organizations will also be more successful. Also, cities that have a reasonably educated labor force but an undersupply of jobs are more conducive to group lending programs.
Directory of U.S. Microenterprise Programs (1997) compiled by the Aspen Institute, www.aspeninst.org