Photo: Sun Pictures / Lakshman (flickr)

Ever heard of a 13-year-old bank manager?

It’s not an uncommon sight at the Children’s Development Bank (CDB), a unique initiative by the Delhi-based NGO Butterflies that helps street children help themselves. CDB, founded in Delhi in 2001, offers street and working children the opportunity to invest in a different lifestyle.

Fear of theft and lack of future planning have often led working children to spend what little they earn on short-term pleasures, such as cigarettes or cinema tickets. By providing a safe place to hold money, however, CDB encourages them to start a savings habit.

CDB is particularly innovative in the way it is run. It works as a cooperative, in which children are both the owners and decision makers. Rules, membership standards and loan criteria are set by members who are all between the ages of eight and 18. The idea is for kids to "put money aside for themselves without worry that it will be lost or stolen, save for things that they need or want, such as clothes, (and) plan to improve themselves, by saving for education and training."

CDB now boasts more than 8,250 members and operates in 12 locations, including branches in Afghanistan, Bangladesh, Nepal and Sri Lanka.

Microfinance has worked in the developing world, but will it work here? Photo: PetroleumJelliffe (flickr)

A few weeks ago microfinance pioneer Professor Muhammad Yunus was in Queens, New York. No, he wasn’t soliciting funding or international support for his Bangladesh-based microlending institution. He was cutting the ribbon on the brand new Grameen Bank America building.

Thousands of miles away from the original Grameen Bank, the American version will function much like its Bangladeshi counterpart: loaning to groups of women rather than individuals. Like the women who first participated in Yunus’ innovative banking scheme, American borrowers will convene at one member’s house to collect weekly dues. This type of group-lending model increases accountability, since defaulting on your loan affects your peers' access to credit as well as your own.

The Grameen Bank targets women because they're more reliable borrowers. To date, Grameen America has loaned upwards of $250,000 dollars to more than 100 women who are using their $500 to $3,000 loans to establish or expand businesses ranging from floral arranging to house cleaning.

But Yunus has some skeptics to win over. Many question whether the Grameen model will resonate with Americans. Microfinance expert Saiful Islam says "Bangladeshis, Indians, Latinos will follow it, but I don’t know about others." In 1985, a similar program started by Yunus in rural Arkansas at the request of then-Governor Bill Clinton failed due to mistrust among participants, according to Shorebank's Mary Houghton, who helped advise the microfinance experiment in Arkansas.

It does seem somewhat of a strange fit: banking targeted to empower the poorest of the poor in one of the most prosperous countries in the world?

The United States does have its fair share of people living in poverty, however. Immigrants in particular have a hard time accessing credit and are more likely to use predatory lending agencies that charge steep interest rates. What's more, the Center for Financial Services and Innovation, reports that approximately 40 million American households are considered underbanked.

Also, contrary to public perception, microcredit is not aimed at the poorest of the poor. "It’s actually supposed to help those below a certain poverty line who are looking for self-employment as a route out of poverty," says Raj Desai of the Brookings Institution.

In that case, the U.S.-based bank may run into trouble. Approximately 1 out of every 11 Americans work for themselves, while about 1 in 4 in Bangladesh are self-employed.

Yunus will need time to prove that the American model can be successful. It may be that American women need more than greater financial access to climb out of poverty. But Yunus' large following and wide array of awards — including a Nobel Peace Prize — suggest he has a fighting chance.

Photo: Cassandra Nelson/Mercy Corps

James Surowiecki's commentary in The New Yorker this week offers a sobering reassessment of microfinance. His thesis is not that microloans are a bad thing, just that, if their goal is "to make poor countries richer," currently they aim at the wrong segment of the economy.

Surowiecki observes that often "Microloans are often used to “smooth consumption” — tiding a borrower over in times of crisis." This is much the same role that revolving credit like credit cards play in more mature economies. While this type of bridging consumer credit is tremendously important to the stability of a single household, it is isn't the type of credit that leads to the creation of jobs, something most developing nations are in dire need of.

"In high-income countries," Surowiecki writes, "more than sixty per cent of all jobs [are created by companies] bigger than a fruit stand but smaller than a Fortune 1000 corporation. It is this middle tier of small-to-medium-sized enterprises that a nation must cultivate if it is shooting for long-term economic growth."

Thatcher Cook for Mercy Corps

"Microloans" are all the rage these days, as more people embrace the theory that small loans to the poor can stamp out poverty everywhere.

But even one of the main proponents of microfinance — the founder of the Internet microloan site Kiva — told the Council on Foreign Relations that microfinance is "just one factor" in economic growth:

So my conclusion at this point is that microfinance is weakly associated with macroeconomic growth. It’s just one factor; it’s not necessarily going to cause a country’s GDP [gross domestic product] to increase. It has to be accompanied by things like good governance, infrastructure, transparency in economics, and all sorts of other things that microfinance cannot in and of itself to bring about.

Flannery also points out that loans of $50 or $100 cannot build roads or schools. Microfinance certainly has its place, but Flannery provides a nice reminder that it's not a cure-all.

In a land where three farmers commit suicide per day, microfinance is making positive difference in Vidarbha- India's primary cotton growing region. Over 500,000 female small entrepreneurs there are determined to lift their families from the burden of debt by forming microfinance groups and finding alternative ways to make an income.

The micro credit banks urges them to save with them, with each member depositing money, ranging from 50 rupees to 1,000 rupees every month. The bank in turn provides credit to the group, whose members borrow money from the group depending on their needs.

Thatcher Cook for Mercy Corps

Lucy Conger's story "The Big-Country Enigma" examines why micro-credit has flourished in smaller countries like Peru and Bolivia while remaining somewhat small in scale in countries such as Brazil.

Does both over and under government regulation stand in the way to microfinance?

Business Week's "The Ugly Side of Microlending” presents a seemingly untold story regarding microfinance. Many (if not all) in the aid and development sector laud the triumphs of micro-credit for the world's poor; and, in truth it has been a driving force for positive change in a number of people's lives. However, when there is a profit to be made a variety of more unsavory business practices arise.

Keith Epstein and Geri Smith do a great job of investigating the variety of for-profit banks that operate within Mexico, painting a bleak picture for unsophisticated and largely uneducated borrowers. Drawn by lack of regulations and a government bogged down by corruption Mexican banks are charging anyway from 50% to 120% annual interest on loans.

So, what does that mean exactly? After a 104 week payment plan of $23 a month, an average borrower will end up paying more than double for a $1,100 Whirlpool refrigerator. What's more-- large corporations such as Wal-Mart are moving onto the scene, having obtained their Mexican banking license last year.

The flip side of microfinance is one that should receive more attention. With the advent of micro-credit to the world's radar screen one cannot blithely assume that all lending institutions are created equal. So what's the answer? More regulation? Increased education? I suppose one cannot discount that America has similar institutions-- the Pay Day cash lending services that frequently appear in strip malls often invite sharp criticism domestically. Either way—it seems clear that for profit banking institutions charging astronomical interest rates seem to be perpetuating the very poverty they are supposedly attempting to alleviate.