Micro Lending Gains As Way Out of Welfare

DESIREE STEWART'S hair salon is just over one year old. The equipment is used, the pipes are bad, and there are no mirrors on the walls - yet. But the growing Chicago business is making a profit and, if things go as planned, the single mother will soon be able to get off welfare for the first time in seven years.

Ms. Stewart was able to start her business after joining one of the nation's micro-credit lending institutions. A relatively new concept in the United States, micro-credit is touted as one of the few success stories in the third world's fight against poverty. And as Republicans and Democrats in Washington battle now over how to restructure welfare, it may be one of this nation's answers as well.

The idea behind micro-credit lending is simple: Give poor people access to small amounts of capital - amounts sometimes as little as $100 - to buy the initial goods that are often needed to start a small business. For someone like Stewart, who took out a loan for $1,500 from the Women's Self Employment Project (WSEP) in Chicago, the money meant being able to buy hair dryers, sinks, and beautician chairs. For someone like Octavia Cavalier in Alexandria, Va., $250 was all she needed to buy a vacuum cleaner, gas for her car and some flyers to advertise her cleaning service.

NOT a grant or a handout, the money loaned in micro-credit is repaid at market-level interest rates. Borrowers form small groups of five to 25 people who take responsibility for the repayment of one another's loans. Supporters say the lending method builds community, helps the poor get on their feet, and theoretically, turns a profit.

Muhammad Yunus, the founder of Grameen Bank, the largest micro-lending institution in the world, says institutions that won't lend to the poor are not only exacerbating the world's poverty, they are also missing opportunities to make money.

"Traditional banks think you need a lot of collateral before you're trustworthy enough to get a loan," Mr. Yunus says. "But I have seen myself that there is something you can count on more than a lot of financial collateral, and that is each person's drive to better their living situation for themselves and their families. This is such a strong drive its worth banking on."

The Grameen Bank, based in Dhaka, Bangladesh, has lent more than $1 billion to 2 million families in that country. Nearly half of the original borrowers have crossed the threshold out of poverty, and the concept has launched similar enterprises in other parts of Asia, in Latin America, and Africa.

But can such an idea really work in the US? Doubters cite a list of concerns.

*They question whether the US economy - so different from those in the third world - can absorb micro-entrepreneurs.

*They say the loans are too small to make any real difference in a person's financial future.

*They point to community characteristics, like violence and distrust in the inner cities and pride and privacy in rural areas, as being unlikely foundations upon which to build peer support lending.

But those in micro-lending say that while the concerns are sincere, a look at the success of the programs and the businesses they've spawned prove that they are ill-founded.

"Micro-lending in the United States fills a gap that continues to exist even though there are now institutions which give loans of $5,000 and up," says Donna Fabiana, US director of The Foundation for International Community Assistance (FINCA), a Washington-based micro-enterprise lending institution.

"This credit goes to people who normally don't have access to money, it enables them to amass some capital, learn about networking and build their businesses," Ms. Fabiana says. "While third-world poverty looks different, the obstacles that the poor face are often very similar to those felt here. Access to even small amounts of capital is one of the greatest obstacles."

The few studies that have been done on micro-credit in this country also point to success. According to research being conducted by the Aspen Institute, 78 percent of the businesses funded initially by micro-credit have survived into the third year of the study. That in itself is an enormous achievement, as the typical survival rate for small businesses in the US is only 50 percent. And loan repayment rates have been high as well, ranging from 65 to 89 percent.

"It's one piece of the solution," says Peggy Clark of the Aspen Institute's Self-Employment Learning Project in Washington.. "There's no single answer to the enormous problem of poverty, but it's one solution and it's proven to be one of the most effective strategies we're aware of."

In comparing the success of micro-credit in the third world with that in the US, experts admit that micro-enterprise lending institutions are finding it difficult to make a profit and have discovered that because of the structure of the US economy, they need to offer greater levels of technical support and training to their clients. But that is not seen as an insurmountable hurdle.

"We were told it would never work in Bangladesh, and it's working beautifully there," Yunus says."It's working all over the world, but yet, some say the United States is different. Okay. Let's say the US is different. Look at it this way. We have a car. It works on dirt roads. Maybe you need to adjust the car so that it will drive well on the highway, but that's not the problem. Your designers can create such a car."