NB Financial Health
Good News for Microfinance: Grameen America Discusses Promising New Research on its Anti-Poverty Impact
Though both microfinance and the Grameen brand are associated more with emerging markets, they’re both very much present in the United States. Grameen America, a sister organization of Grameen Foundation, is a prominent practitioner of the group lending model pioneered by Grameen Bank in Bangladesh. The organization provides loans to low-income female entrepreneurs in the U.S., who apply for loans as a group – then meet weekly to make repayments.
In a global development environment where the social impact of microfinance has come under increasing scrutiny, Grameen America recently announced some encouraging early findings from an ambitious new research study of its approach. The Microfinance in the United States: Early Impacts of the Grameen America Program report, funded by the Robin Hood Foundation and conducted by MDRC, has been billed as a “first-of-its-kind random assignment study” of the anti-poverty impact of group microfinance in the U.S. It found several promising results of the program, including:
- Grameen America members were 13% more likely than the control group to report that they could afford to buy the things they needed, and to say their financial situation was better than the previous year.
- The program produced a 22% increase in the attainment of a credit score.
- Over 95% of members reported operating their own businesses six months after joining the program – 11% more than the control group average.
We spoke with Marcus Berkowitz, Vice President Technology & Innovation at Grameen America, to discuss these results and their implications for microfinance in the U.S. and globally.
James Militzer: Briefly describe Grameen America’s approach, and how its work is similar/different to the work Grameen Foundation does in less developed countries.
Marcus Berkowitz: Grameen America is a national 501(c)(3) community development financial institution founded by Professor Muhammad Yunus, the founder of Grameen Bank, the largest microfinance organization and community development bank in Bangladesh. Recognizing the widespread issue of domestic poverty in the U.S. and the lack of access to traditional financial services that low-income women in the U.S. disproportionately face, in 2008, Professor Yunus founded Grameen America to bring access to affordable capital in the form of low-interest microloans to low-income women entrepreneurs in the U.S.
Leveraging the same group-lending model and sharing many of the same principles of the Grameen Bank, the Grameen America program is tailored to fit the unique needs of an industrialized country. For example, Grameen America centers are based mostly in or adjacent to major metropolitan areas rather than in rural areas. In addition to the traditional microloan program and the emphasis on asset-building, the U.S. program has added a credit-building component, as that is important in this country to enable individuals to gain access to the formal financial credit system. The businesses that the women choose to apply their loans toward may also be different based on lifestyles, ie: a hair salon versus a stand at the local market. Loan amounts tend to be higher in the U.S., and Grameen America has enhanced abilities to use technology to drive efficiencies in the program as well.
JM: Talk a bit about the reasons microfinance is needed in a wealthy country like the U.S. – how serious is the challenge of poverty there, and does it have any unique characteristics not seen in other countries?
MB: There are 40 million people living in poverty in the U.S., including 16 million women. More than half of low-income children live in female-headed households. Women entrepreneurs have the potential to serve as powerful economic engines, as additional income they generate and jobs they create through their businesses could transform their families and communities. However, many women are shut out of the traditional U.S. financial system due to poor credit and insufficient income (credit score and history in particular being a unique challenge to the American market): 30% of low-income consumers have no credit history and women entrepreneurs account for only 4% of all conventional small business loans.
As the initial results of MDRC’s evaluation of the Grameen America program, and the overall success of the program over the past decade demonstrates, an effective microfinance program can be incredibly instrumental in empowering unbanked or underbanked women in the U.S. to gain access to funds they need to launch their own businesses, alleviating financial hardship. Beyond the disbursement of microloans, the Grameen America program also enforces financial literacy and asset-building by enabling women who would otherwise have little or no access to traditional financial services to build credit scores and open a no-fee savings account with one of our partner banks – and further, to build social networks with their fellow women entrepreneurs who meet once a week to repay their loans and discuss their businesses.
JM: Let’s talk about the new research. Grameen America has described it as “the most rigorous, independent, third-party evaluation of group microfinance in the United States,” and the first-ever randomized controlled trial (RCT) to evaluate the effects of a microfinance program on poverty alleviation in the U.S. Why was it important to do this study now, and why did you decide to use an RCT?
MB: The Grameen America program was conceived and feasibility tested in the aftermath of the 2008 financial crisis as the nation was grappling with collapse, unemployment and distrust in its financial institutions. The study came into fruition a few years later in the teeth of the recession, as a test to improve the program and rigorously examine what its effects were. The gap in income between the 10% who make the most money and those who make the least in the U.S. has continued to widen since 1970, according to July 2018 research from the Pew Research Center. With economic inequality in the U.S. heightening, equality for women having moved to the forefront of the agenda, and governments failing to provide adequate poverty alleviation programs across the U.S.’ major cities, Grameen America felt it was the right time to have its program evaluated by MDRC so that the results can ultimately bring light to the huge potential of microfinance in the U.S., and encourage all those who can to get involved in spreading this model throughout the country.
Additionally, while there have been several evaluations of international microfinance programs, few robust studies, and no randomized controlled trials, have been conducted of U.S. group microfinance programs. In MDRC’s Grameen America evaluation, intact lending groups were randomized to maximize the difference in take-up of microloans between the program and control groups. Though this made it difficult to recruit for the study, it set the study up to have a larger treatment contrast and, therefore, provide a fairer test of the group-lending model than some of the tests designed previously. MDRC chose to leverage an RCT to evaluate Grameen America as it represents the “gold standard” of evaluations, using the same rigorous methods as pharmaceutical trials.
JM: Briefly describe the study: Who are the participants, what specifically is being evaluated, and why?
MB: MDRC’s study examined 1,492 women in 300 loan groups who applied for the Grameen America program in Union City, New Jersey. The women were placed into two groups – those eligible to receive loans from Grameen America (“members”) and those not (“the control group”). The outcomes of the two groups were compared over time. The lending groups were randomized to maximize the difference in take-up of microloans between Grameen America members and the control group. The early results of the Grameen America program evaluation are the first set of results in the long-term study conducted by MDRC, the first of which tested the results of a group microlending program, which examined the effects of the program on several domains – including the ability to afford the things that members needed, the attainment of credit scores and business operations.
Grameen America chose to have its microloan program evaluated by MDRC to prove the impact of its unique group microlending program on low-income women entrepreneurs in the United States. MDRC has a stellar reputation for conducting nonpartisan research that evaluates real-world policies and programs targeted to low-income people, so we felt they were the ideal research partner.
JM: Summarize the results of the research so far: Which findings seem most significant to you? Were there any results that surprised you?
MB: The early results of MDRC’s long-term study are encouraging. Just six months after joining the Grameen America program, over 95% of Grameen America members reported operating their own businesses, an increase of 11 percentage points over the control group average. Members had also experienced less financial hardship and were more likely to afford the items they needed than the control group. A particularly exciting finding was that Grameen America members were more likely to establish a credit score within 7-12 months of study entry and to have attained a Prime credit score – a top tier of creditworthiness.
JM: Early results show that about 1/3 of borrowers in the study are operating (or plan to start) businesses with the “multi-level marketing” model popularized by companies like Mary Kay, Herbalife and Amway – is this concerning at all, given that studies suggest that few entrepreneurs in these sales networks make much money, and many actually lose money?
MB: Grameen America does not encourage nor advise its borrowers to use their microloans towards multi-level marketing programs, or towards any specific industry or sector.
JM: The president of MDRC, the research organization you worked with, has noted that the study showed “reductions in measures of financial hardship, which puts the program in a position to increase income and reduce poverty … down the road.” But some media have already described it as confirming that Grameen microloans help fight poverty. Are you concerned that people might over-interpret these early, promising results – or that later results might not be as encouraging in terms of actual poverty alleviation?
MB: Though the early results of MDRC’s Grameen America Evaluation are very promising, it would be overly simplistic to imply that group microloan programs are the sole solution to fighting and overcoming poverty in the U.S. Rather, the early results of the RCT are encouraging signs that microloans can be a powerful tool to help alleviate financial hardship in the U.S. The roadmap of MDRC’s study intends to analyze results at the 18-month and 36-month mark, with an eye to go as far as a five-year evaluation. Future reports will present longer-term impacts on a much wider range of outcomes, including overall income and earnings, which are the ultimate goals of the Grameen America program.
Poverty is an extremely complex and multi-layered issue, and two issues that we’ve already identified and are working towards bringing to our Centers are healthcare and education. We’ve been piloting a healthcare program in our Bronx branch called Promotoras that we hope to eventually roll out across all of our branches.
JM: What are your plans for this research, and how will the results of this ongoing study impact Grameen America’s work and future strategy?
MB: MDRC will continue to measure the long-term impacts of the Grameen America program to examine a much wider array of outcomes such as business earnings, business sustainability and more. The longer term results will certainly impact Grameen America’s work and future strategy. They will shape how we structure our financial literacy programs, and determine if microloans are a long-term solution to poverty – and we hope to also determine the effects of microloans on family life and even work-life balance of our borrowers. We hope that the results of the study will also influence public policy and private sector solutions to fill the gaps that our nation’s traditional financial institutions have left, which have left a wide swath of the population unbanked. We also want to inform solutions that eventually put an end to the very high rates currently found in the payday loan industry, which continues to harm low-income Americans.
JM: How do you see these results potentially impacting the broader conversation around microfinance in the U.S., and perhaps globally?
MB: The MDRC evaluation of Grameen America’s program represents a significant step forward in achieving adequate measurement and evaluation of the impact of microfinance on poverty alleviation in the U.S. We hope this can serve as a guidepost for the continued evolution and potential expansion of effective microfinance programs in the U.S., and ultimately, for the creation of public policy and private sector solutions to encourage the expansion of microfinance in this country.
JM: Relatedly, I’d be remiss not to ask if the topic of this research, and your choice to use the RCT methodology, was motivated in any way by the influential set of RCTs published in the American Economic Journal: Applied Economics a few years ago, which called into question the impact of microcredit on poverty. Do you see these early results as a potential counterpoint to those findings, or is it too soon to say? Are you hoping to push back on the narrative those RCTs helped establish?
MB: Those specific studies were released in 2015, at which point we had long since chosen the RCT design, and were already well into the random assignment portion of the study.
We set out for this to be the single most rigorous randomized controlled trial test of a microfinance program in the U.S. Our intent in employing the RCT methodology was based on its ability to best inform causal differences. Our goal for this study is to add nuance to the conversation around the impact of microfinance in the U.S.
James Militzer is an editor at NextBillion.
Photo: Members of a Grameen America lending group, photo courtesy of Grameen America.