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To Combat Rising U.S. Poverty, Banks Are Taking Lessons From The Developing World

Poor people in the U.S. need help, too, and banks are finding ways to give it to them by following models set up in places like Bangladesh.

The last time the income of haves and have-nots has been this far apart in the U.S. was the Gilded Age of robber barons and monopolies. Even today’s 1% are down-and-out compared to their richer cousins in the stratosphere of the 0.1%. Such inequality is propelling viral videos across the web (as well as research into the widening wealth gap in America (PDF). 

Now a handful of organizations are pioneering new ways to get money more productively into the hands of the poor, especially the bottom 20% of the population which holds just 0.1% of the nation’s wealth (PDF). Taking lessons from the slums of the developing world, financial institutions are carving out businesses for the poorest in the richest country on Earth.

Grameen Bank, a microfinance institution that started lending to Bangladesh’s rural poor in the 1970s, is now a major player in the U.S. microfinance sector, one of among about 400 institutions. Coming to the U.S., says Stephen Vogel, CEO for Grameen America, was not as far as the countries’ different circumstances suggest. "The poor, no matter where they live, have the same issues if they live in Bangladesh or New York City:" subsistence incomes, limited job training, inaccessible banking services, and generational poverty.

"We do a lot of things that would not be a normal to a bank underwriting process," says Vogel. Borrowers must fall below the poverty line, accept home visits from loan officers, enroll in financial education, open savings accounts (most are unbanked) and deposit $2 each week. And Grameen’s borrowers are almost all women, since the group focuses on the most vulnerable, typically women and children.

Grameen’s loans to small entrepreneurs so far—mostly food cart owners, home workers and others—often go to people without a credit score, or a formal business plan, and average about $1,500. "They just have an idea, dream, and desire to help themselves," says Vogel. Grameen has opened 11 branch offices in six different states from Omaha to Oakland, with plans to open in about six new cities this year. While none are profitable yet, Vogel says he expect this first branch office to be in the black this year, and others to follow soon after.

A second arrival from developed to developed world finance is the popular online lending Kiva platform which sends individual loans as small as $25 to about one million microlenders worldwide. Investors—often individuals—can reinvest or withdraw their money once borrowers have returned it (which they do about 99% of the time).

The nonprofit is now launching Kiva Cities to expand its microfinance approach to small American business owners. Kiva Cities uses local trust networks by partnering with civic groups, community organizations and even conventional financial institutions to invest in small businesses unlikely to receive the small loans below $50,000 that most banks ignore as too costly to administer.

It’s just a natural extension of Kiva’s work in the developing world, says Jason Riggs, director of communications at Kiva. "Through this model, [local organizations] tired of empty storefronts can take these trust networks and turn them into something where we can vouch for each other." Kiva has already established programs in Detroit, New Orleans, Los Angeles, Washington, D.C., and Little Rock, and is lending about $7,000 per loan on average. Although the repayment rate is slightly lower than its international average—about 88%—it is rolling out new programs with the potential to create jobs and pull people out of poverty. "We help create the tipping point for young small companies so they can move up the financial access ladder," says Riggs.

For the U.S., the poorest countries may lead the way on how to finance the revival of Main Street.