The Wall Street Journal
By: Joseph Adinolfi
September 8, 2012
Mohamed Diallo is a foot soldier in the army of savers that banks are leaving behind. A livery cabdriver in New York, he wants to start a fruit-importing business. But his dream is clashing with a harsh financial reality.
After subtracting the cost of leasing his cab, his rent and other expenses like food and a cellphone, the 56-year-old recent immigrant from Guinea typically has just $300 to deposit into a savings account at the end of each month.
With no credit history, he turned to a form of lending usually associated with developing countries: a microloan. He got a $2,000, two-year loan through the Business Center for New Americans, a nonprofit group with a mission to help refugees, immigrants and other people achieve economic self-sufficiency.
The loan and a $4,000 grant through a U.S. program aimed at spurring savings among low-income refugees made it possible for him to use his savings to buy a 2004 Lincoln Town Car for $8,000. "I opened a savings account, but I don't understand how to ask for a loan," he said.
Mr. Diallo's aspiration to financial independence is shared by millions of people in the U.S. who find it difficult to access mainstream banking because of their modest means. Some are turning to microlending, or loans of often just a few thousand dollars, for the funds they need to upgrade or buy equipment.
Microlending is well-established in developing countries like Bangladesh and Mexico. It also is growing in the U.S., the world's largest economy and home to the globe's most sophisticated financial system.
Generally, many large banks in the U.S. are turning away from small-business loans, preferring instead to issue business credit cards to small-business owners, according to Bob Coleman of Coleman Publishing, a website and weekly newsletter about small-business finance.
Little data exist on the lending practices of nonprofit and for-profit U.S. microlenders, but bankers say the business is expanding. The U.S. microlending marketplace generally is slightly different from that in other countries, where peer lending is more common and where loans can be very tiny, sometimes just hundreds of dollars or less.
The U.S. nonprofit microlenders generally receive funding from private donations and from state and federal programs. Nearly all of them are classified as community development financial institutions and receive block grants ranging from about $1,000 to $1.5 million annually through the U.S. Small Business Administration. The U.S. agency distributed nearly $47.5 million in microloans during its 2011 fiscal year, the largest sum in its 20-year history, through 170 nonprofit lenders.
In the last decade, the SBA microloan program's average loan size has steadily declined from about $14,200 to $11,750, a sign that lenders have continued to supply small-dollar loans, even as credit dried up during the economic downturn. The Business Center for New Americans, Grameen America, and members of the Accion U.S. Network in New York, Chicago and Texas are all partners with the SBA microloan program.
Grameen America says it so far has made more than 25,000 loans, with an average loan size of $2,200, since the 2008 opening of its first branch in Queens, N.Y. It was founded by Bangladeshi banker Muhammad Yunus, a Nobel Peace Prize recipient. Mr. Yunus sought to transplant Grameen Bank's model from Bangladesh to the U.S. Grameen America says its default rate is close to zero.
Some for-profit U.S. microlenders, typically small, closely held banks, such as Borrego Springs Bank, of Borrego Springs, Calif., with $142 million in assets, offer bigger microloans of $20,000 to $50,000 apiece.
These lenders generally participate in other SBA programs tailored to banks. The SBA partially guarantees the loans.
For traditional banks, the cost of documentation and underwriting a loan are the same regardless of size. Most prefer to invest their time and resources in larger loans that will earn them more interest.
"You can't afford to spend the man-hours in traditional underwriting for a $50,000 loan that you can for a $2 million loan, " says Fred Crispen, an executive vice president at Borrego, one of the small number of for-profit banks that sees loans of less than $40,000 as profitable.
Moustapha Cisse, 49, a street vendor from Senegal who sells clothing and accessories in Manhattan, received a $2,000 loan in early August from the business center after being ticketed three times in one day for positioning his cart too far from the curb and other violations. About $1,500 of the money will be used to pay off the tickets, an expense that he says would have put his business in jeopardy. His first payment is due Sept. 15.
"I tried to take a loan from a bank, but they turned me down," Mr. Cisse said. "I have bad credit....I want to pay them the money I owe them. I want to have good credit."
The default rate on loans made by the nonprofit Business Center for New Americans that lent to Mr. Diallo is about 8%, according to Yanki Tshering, its executive director.
Mr. Diallo, who lives with four of his five children in Brooklyn, N.Y., now can save about $700 a month because he no longer has to pay weekly fees to lease hisName