Microcredit Gets Texas-Size Makeover

Monday, October 1, 2007

The microcredit ideas of Nobel Peace Prize-winning Bangladeshi economist Muhammad Yunus?providing tiny loans to help poor people start businesses?succeeded wildly in the developing world, but lenders hoping to transplant the strategy to Dallas had to do some serious retooling to ward off disaster. Michael Hall writes in Texas Monthly that a nonprofit called the PLAN Fund saw Dallas as a natural candidate for microcredit: Nearly three-fifths of the city was in the low-to-moderate income range, a group that?s all-too-often often ?unbankable? when it comes to qualifying for a business loan.

borrowingBeginning in 1997, PLAN Fund put prospective borrowers through a ten-hour certification process, after which it handed out loans averaging $1,000 each to a total of 351 people in the first few years. The results were ?not worthy of any Nobel Peace Prizes,? writes Mr. Hall. Default rates soared to 40%. ?The word on the street was that we were easy money,? says Gwen Moore, a PLAN Fund founder. PLAN, which stands for Peer Lending Action Network and is affiliated with Yunus-founded Grameen Bank, decided it had to better adapt microcredit to its U.S. setting. After all, there were a few differences between Bangladesh and Dallas.

For one thing, in Bangladesh, most people make their living through entrepreneurship, though it may consist of simple things like taking in laundry or selling pencils on the street. ?The alternative [to entrepreneurship] is starvation,? writes Mr. Hall. In contrast, starting a business in the U.S. involves many more complications, and those who choose not to face them probably won?t starve, with public assistance and private charity widely available. So launching a startup business in the U.S. requires a different kind of commitment.

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Source: Wall Street Journal (link opens in a new window)