Do Microcredit Lending Programs Help The Poor?

A Comparative Analysis
of Programs in Bangladesh and the U.S.A.

Like the right to

food, clothing, shelter, education and health,
credit should also be recognized as a
fundamental human right.
- Muhammad Yunus

Fahima Aziz
Department of Economics
Hamline University

Paper presented at 2011 Second European Conference on Microfinance,

Groginnen.
June 16-18, 2011

INTRODUCTION
Micro-credit programs were first introduced in developing countries and have grown rapidly in the
United States and in rest of the world. Initially, developing countries began implementing
microenterprise programs to bootstrap the poor out of poverty through entrepreneurship, or selfemployment, and instilling skills for employment, which would then stimulate economic
development in the surrounding communities. The main focus of many microcredit programs is to
break the vicious cycle of poverty. Some argue that welfare programs sometime tend to contribute
to the dependency and despair of the poor, whereas microfinance programs help the poor rise out
of poverty by giving them a sense of dignity and self-respect. Consequently, microenterprise
programs also have a social impact on its borrowers by increasing self-confidence and self-worth,
which further lead to empowering the poor.
The poor are generally unable to obtain credit for working capital. There are approximately over 1
billion people worldwide who have to live on less than $1 a day and over 2 billion people are
malnourished (UNDP report 2010). Therefore, in developing countries, where credit is virtually
nonexistent for the poor, microenterprise programs were created to collateral-free credit to lowincome people who historically have been considered credit risks by conventional banks (Aziz,
2002). Traditional banks will not consider lending to the poor for a variety of reasons. First of all,
traditional banks usually do not make loans to home businesses, which is typically the type of
business operated by microentrepreneurs. Second, the poor are considered to be very high credit
risks because they lack collateral, credit history and/or previous experience operating a business.
Furthermore, microenterprise loans are unattractive to traditional banks because the transactions
costs of a small loan are high relative to the interest and fees the loan generates. In other words, it

is not profitable for traditional financial institutions to lend such small amounts because the
transaction costs are essentially the same as they are for larger loans. Consequently, the poor could
only obtain credit from local moneylenders, who charge astronomically high interest rates, leaving
the poor with essentially zero profit from their sales. Therefore, microenterprise programs have
become a viable and much needed alternative for the poor in developing countries to obtain credit.
The estimated market for microloans is an estimated several hundred billion people

Microenterprise programs became a success story for the poor as a result of the Grameen Bank in
Bangladesh, the first to introduce micro-credit lending in 1976. Mohammad Yunus, an economics
professor who was frustrated with large-scale international programs that had little impact on
alleviating poverty, originally established the bank. One of the most phenomenal aspects of
Grameen Bank is that is has proved the theory of conventional banks to be wrong. As mentioned
previously, conventional banks were skeptic of the idea of lending to the poor, who have no
collateral, and many of the poor that Grameen Bank help are illiterate and landless. However,
Grameen Bank has proved that the poor can pay back their loans and increase their income by
providing working capital necessary for business operations.
Grameen Bank has given the poor the opportunity to build an asset base and use the credit to put to
whatever use they choose. The bank not only helps the poor increase their income through selfemployment but also enables the poor to have control over their own lives. The poor with financial
resources at their disposal have the freedom to build their own fate through self-employment,
which gives the poor a sense of empowerment.
Grameen Bank was the first to recognize that the availability of credit is critical for the economic
emancipation of the poor, and as a result, the model of Grameen Bank has received international

attention and has been replicated in many countries throughout the world. According to Grameen
Bank, hundreds of micro-lending programs have replicated the Grameen Bank model in different
countries over the last decade (Grameen Bank Dialogue, 2004). Consequently, Grameen Bank has
been able to reach thousands of poor borrowers around the world indirectly through their positive
influence.
As a result of Grameen Banks international fame, there have been many studies conducted on the
banks micro-lending program. However, there have been very few studies comparing Grameen
Bank to other micro-lending institutions that have emerged in other parts of the world.
Consequently, this research will undertake a comparative analysis between Grameen Bank and
Lakota Fund (LF) in Kyle, South Dakota in the U.S. This research will focus on the similarities
and differences between Grameen Bank and the three micro-lending institutions and how they have
impacted the lives of the poor both socially and financially. The significance of this research is to
determine how successful the a U.S. micro-lending institutions have been in contrast to Grameen
Bank in alleviating poverty in their different socioeconomic environments.
Overall, the methods to be employed in this study are intended to be qualitative rather than
quantitative, and in order to measure how successful the micro-lending institutions have been in
alleviating poverty, the research will examine the following:
Examine how the micro-lending institutions are organized due to their different
cultural and socio-political environment
Examine the primary clientele of the micro-lending institutions by studying the
demographic characteristics, such as race, age, and income level
Examine how the loan procedures of the micro-lending institutions differ. The
requirements for obtaining a loan from the different institutions will be analyzed

 Examine the success rate of the micro-lending institutions, which is measured

by the repayment rate
Examine the financial and social impact the different micro-lending institutions
have had on their borrowers, especially the borrowers perception of the
management of the microcredit institutions and its role in their financial
success.

GRAMEEN BANK
In 1983, Muhammad Yunus founded Grameen (of the village) Bank in Bangladesh, an
innovative lending institution that makes small, unsecured loans to the poorest of the poor. Yunus
made the discovery that rigid collateral requirements, credit guarantees, and inflexible repayment
schedules made it virtually impossible for microenterprise borrowers to obtain credit from
commercial banks, which regard microenterprises as too risky and costly to administer.
Consequently, the poor were trapped in the vicious cycle of poverty because their only source of
credit was from local traders and moneylenders, who would exploit the poor. Since the local
commercial banks were reluctant to lend to the poor and the local moneylenders were taking
advantage of the poor, Yunus requested and was granted permission to set up an independent bank
in 1983, known as Grameen Bank. Yunus has successfully proved his hypothesis that the poor can
lift themselves out of poverty through self-employment as long as they are supplied with the
correct amount of capital. Furthermore, Yunus has proved that the poor pay back their loans
because they have a greater incentive than the rich to repay their debts: it is their only way out of
destitution. (Yunnus, 2000)
Yunnus established Grameen Bank with the following five objectives in mind:

Extend banking facilities to the poor men and women

Eliminate the exploitation of the poor by money lenders

Create opportunities for self-employment for the vast multitude of unemployed

people in rural Bangladesh

Bring the disadvantaged, traditionally the women from the poorest households,
within the fold of an organizational format, which they can understand and
manage by themselves

Reverse the age-old vicious circle of low income, low saving, low
investment, into a virtuous circle of low income, injection of credit,
investment, more income, more savings, more investment, more income
( Grameen Bank Reports)

As a result of Grameen Banks bold and daring goals, it is currently the largest rural financial
institution in the country (Grameen Bank Report, 2010). Grameen Bank is truly an institution for,
and of the poor, because the poor own ninety percent of the shares of the bank, while the
government owns the remaining ten percent.
Grameen Bank now has 2,565 branches and serves in 81,378 villages in the country. It has nearly
8.36 million borrowers and the clients of the bank have been predominantly women (97%), who
took the opportunity of borrowing in a group of four persons with no collateral (Aziz, 2002). As
mentioned previously, Grameen Bank lends out very small amounts of credit to the poor with the
average loan of -----(US). Even though Grameen Bank borrows to clientele without any collateral,
they have an outstanding repayment rate of 97.32 percent, a rate envied by most commercial
banks. The commercial banks in Bangladesh have a repayment rate of only seventy percent on
agricultural loans and ninety percent for its industrial loans. Part of the difference in the repayment

rates is a result of the mindset of the borrowers. For example, the rich can avoid the consequences
of non-payment, whereas the poor cannot. The poor value the access to credit so highly because it
gives them the opportunity to rise out of the depths of poverty.
Yunus
believes credit is a fundamental human right, which the poor are deprived of.
Instead of credit, poor are given charity, which does not help eliminate poverty but helps to sustain
poverty. Charity maintains the vicious cycle of poverty because the poor become dependent on it,
eroding their will and capacity to help themselves climb out of poverty. Credit, unlike charity,
gives the poor the tools they need to break the vicious cycle of poverty they are trapped in.
As a result, the goal of Grameen Bank is to target the poorest of the poor, defined as the bottom
twenty-five percent of the population, primarily women because they bear the greatest burden of
poverty. Grameen Bank ensures they reach their target market through a simple test they devised:
anyone wanting to join Grameen Bank needs to prove that they own less than half an acre of land
and that their total wealth does not exceed the [market] value of one acre of medium-quality land
(Yunus, 20000).
Currently, of the 8.36 million Grameen Bank borrowers, ninety percent are women because they
are more likely than men to be poor. The United Nations Development Program reported, [O]f
the 1.3 billion people worldwide who live in extreme poverty, seventy percent our women.
[Furthermore,] women earn only ten percent of the worlds income and own less than ten percent
of the worlds property (Grameen Dialogue, 2000-2008). The low status of women reported by
the United National Development Program is evident in Bangladesh. Yunus says that the
Bangladeshi women experience hunger and poverty more intensely than men. In addition, it is
traditionally the responsibility of the woman to stay home and take care of the family with little to

no resources, and if anyone in the family has to starve as a result of the dire circumstances, there is
an unwritten rule that it has to be the mother.
Yunus also says it is the mother who suffers the traumatic experience of not being able to care for
her children properly. It is the woman who is unable to feed her children during times of famine or
food scarcity. As a result, if poor women are given the opportunity to fight against hunger and
poverty, they are more determined, resourceful, and creative in generating income for the family.
The women have an intense drive to move up in society, which is demonstrated by their hard work
and willingness to make sacrifices to increase the welfare of their children. In other words, the
women are more reliable than men because they not only pay back their loans much more
consistently, but the profits from their income-generating activities are more likely to benefit the
children. The women are less likely to misuse funds, and more likely to use them to improve the
overall welfare of the family or for household and/or capital improvements. According to Yunus,
If being poor is tough, being a poor woman is toughest (Grameen Bank, 2010).
Also, Grameen Bank discovered that women use the skills they learn from doing household work
in their income-generating activities. For example, some of the income-generating activities of the
women borrowers involve making handicraft items such as baskets and mats from bamboo and
cane, rearing poultry and raising animals, like cows and goats, and growing vegetables and fruits in
their gardens. Therefore, it is quite common for women to already have the skills necessary to
operate a microenterprise.
There is a recognizable difference between the lives of women who belong to Grameen Bank and
those who are non-Grameen Bank members. Independent studies by the World Bank and others
indicate that within five years, about half of Grameen Banks million borrowers are able to climb
out of poverty, and a further quarter linger around the poverty line. Another recent study of

Grameen Bank revealed that over fifty percent of the borrowers escaped poverty over a ten-year
period, whereas only five percent of non-Grameen members climbed out of poverty. Furthermore,
women who are members of Grameen Bank feel a sense of empowerment, which has increased
their status within the household. The husband tends to show his wife more respect due to her
involvement with Grameen Bank, resulting in lower divorce rates and birth rates (Aziz, 2002,
2003).
Grameen Bank is able to have a financial and social impact on the lives of the women as a result of
its lending programs, known as peer group lending. The bank requires the women to form a group
of five in order to receive credit. Once the group has been formed, only two group members are
eligible for, and receive, a loan. Usually, the first two members to receive loans are the poorest
among the group members. However, before eligible borrowers receive loan proceeds, they are
required to participate in a one-to-two week intensive training programs on the philosophy of
Grameen Bank and its rules. The borrowers are also educated about money management ad smallscale economic development.

Typically, the first loans received by the group are no more than $20 (US). Only if the first two
borrowers have repaid the principal and interest over a period of six weeks, do the other members
of the group become eligible for a loan. Consequently, the borrowing prospects of the members
without a loan are contingent upon the timely repayment of the borrowing members. Therefore,
the group members exert peer pressure on one another to keep the loans current. If one member
defaults, the entire group will lose its privilege to borrow from Grameen Bank, which is their only
option to receive inexpensive credit. As a result, the collective responsibility of the group serves
as collateral on the loan.

Normally, the repayment schedule is based on 50 weekly installments with an interest rate of
sixteen percent. When borrowers of Grameen Bank have repaid their first loan, they become
eligible for larger and larger ones. However, the borrowers are allowed to proceed at their own
pace and not according to the needs of the lender (Aziz, 2002).
When
the members of the group receive their first loans, they meet on a weekly basis to make a loan
payment, which takes place in their own village. Unlike traditional banks, the Grameen staff visits
all 81,378 villages to do banking with the more than 8.36 million borrowers at the doorsteps.
Grameen Bank believes the people should not have to go the bank; instead, the bank should go to
the people.
Furthermore, every week at the group meetings, individuals, no matter how poor, must contribute
to a savings fund. The members can borrow from the fund, although, it is contingent upon the
groups consent. Also, the group members need to contribute an additional amount of money to an
emergency fund, which serves as an insurance policy. It is important to Grameen Bank to instill
the concept of savings in the borrowers because it empowers them by allowing them to exert
control over their lives (Aziz, 2002).
However, Grameen Bank is not only a financial intermediary, but also a social intermediary. The
members of Grameen Bank have to support an array of moral tenets, called the 16 Decisions
(Appendix A), which they must abide by in order to continue borrowing from the bank. The 16
Decisions force the borrowers to promise to keep their families small, drink clean water, keep their
dwelling in good repair, plant vegetables and seedlings, and carry out other good health practices.
In addition, the members pledge to follow the four principles of the Bank: discipline, unity,
courage, and hard work. Grameen Bank along with its loan program, encourages birth control,

10

sanitation, and a clean environment, and may the only bank that has this unique characteristic as
part of its lending policy. In addition to the 16 Decisions, the bank also holds workshops on health
care, nutrition, family planning, and business opportunities (Aziz, 2002)
The primary factor underlying Grameen Banks high repayment rate is the use of solidarity groups
or peer circles. Grameen Banks lending program exerts peer pressure on the members for
repayment, but the group also acts like a loan committee and as a monitoring, supervising and
problem-solving body.
When the women form groups of five, they screen each other. The women are very careful about
who they elect to become a part of their group because they are all jointly responsible for
repayment of the loans. In addition, the women create an open environment at the weekly group
meetings in order to prevent lies and corruption, which is prevalent at all levels of the
administration in Bangladesh (Bornstien, 1996, Todd, 1992). During the group meetings, all of the
loan requests are discussed openly in public and individual business plans are scrutinized, which
helps ensure that the enterprises of the women will be well thought out. Consequently, the
womens businesses are more likely to be successful, which enables them to make a profit and
repay their loan in a timely fashion. Furthermore, at the group meetings, the members make sure
the loan proceeds are being put to proper use by the borrowers. As a result, people are more likely
to run their businesses properly because they will be examined frequently by their fellow members
(Bornstien, 1996, Todd, 1992)).
Moreover, the peer group also provides and offers support to their fellow members. The group will
help each other find new customers for their product or service, give advice and lend a helping
hand, and provide moral support and encouragement.

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As a result of Grameen Banks peer lending program, it has significantly influenced not only the
lives of its borrowers, but also has raised national and international awareness of the poor. The
bank has received international fame because it was the first program created to help the poor,
primarily women, to help themselves; that is, women are helping themselves rise out of poverty
(Aziz, 2002).
The women are able to escape poverty because the peer-lending program allows them to gain the
self-confidence to become self-reliant. Consequently, the women feel more empowered, so they
are able to become more involved in household decisions relating to health care, their childrens
education, and the size of the family. The women have learned to take an active role in fighting for
their rights, and according to Yunus, access to credit is a fundamental human right.
Therefore, microlending has become a well-known strategy for improving the lot of the poor. The
Microcredit Summit, a nonprofit campaign compose of virtually all microcredit organizations
worldwide, has set the goal of 175 million of the world's poorest families, especially the women of
those families, are receiving credit for self-employment and other financial and business services
and the goal of reaching $100 million of the worlds poorest families rise above US $1 per day by
the year 2015.
One of the countries taking part in the Microcredit Summit is the United States because even
though the country is one of the richest countries in the world, poverty still prevails. Therefore,
approximately ------ microenterprise programs have been instituted to provide loans and training to
the poor for microenterprises.

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POVERTY IN AMERICA
Although the United States is one of the wealthiest countries worldwide, poverty rate is estimated
to be 13.2% of the U.S. population and the estimated number of people in poverty is 39.1 million
in 2008(www.uscensus.gov.acs). The individuals below the poverty line consisted primarily adults
who had not participated in the labor force during the year and included children. In 2008, 8.9
million adults were considered working poor ( www.bls.gov) Women who support families are
more than twice as likely than males to be in the working poor group. (www.bls.gov) According
to the Bureau of Labor Statistics, the poverty rate for women in the U.S. 6.5 % , with those ages 16
to 24 having the highest poverty rate, which is 27.5 %. In recent decades, the U.S. has seen a
changing labor markets with respect to size and demographic composition (older, women, racial
minorities and immigrants) due to effects of globalization and restructuring of the industrial sector.
Occupations have shifted from agriculture and manufacturing to white collar work. Many of the
manufacturing companies are moving their operations to developing countries to take advantage of
lower wages and less government regulation. Although wages and benefits have also increased
with time, industries are relocating from urban to suburban areas, where many low-income
workers cannot afford to live. The participation of rate of women in the United States has
increased dramatically during the 20th century, increasing to 60 percent in 2007( Lee and Mather,
2008) However, jobs in the manufacturing industry, which provide the best-paying employment
options for low-income, unskilled women have declined drastically over the years. (McKee, 1993)
Many women face obstacles that limit their participation in the labor market.
Furthermore, most of the new jobs available for women are in the service industry, which usually
pays at, or slightly above, the minimum wage. Consequently, it is not surprising to note that

13

women in the United States earn, on average, 80 percent the income of men despite the dramatic
increase in the womens labor force participation rate.
Despite the disparities in pay, women in the United States are more likely than men to be poor for a
variety of reasons. First of all, women have a disproportionate level of responsibility for [their]
children and dependents (McKee, p.6). As a result, women have the burden of locating
employment close to home. Moreover statistics have demonstrated that when couples divorce, the
standard of living of the woman and her children are reduced drastically. Some women have no
legal recourse to child support, but even when the courts have awarded monthly child support
payments to the parent retaining custody of the children, typically the mother, almost forty percent
of the women never receive any child support and an even higher number of women receive
payments sporadically or only partial payments. Another obstacle working mothers face is the lack
of childcare options, resulting from an increasing number of inadequate childcare facilities and the
break down of extended family networks. Furthermore, poor women usually feel a sense of
isolation because they are often single mothers or divorced and lack peer support in times of need
(McKee, 1993).
In addition, the difference between the richest and poorest ten percent of the United States
population is greater than that of many other industrialized countries contributing to high income
inequality (To Our Credit).
Lastly, there are programs funded by the federal, state, and local government such as welfare, food
stamps, and health services, but the actual value of these economic transfers have been steadily
declining due to cuts in the government programs; meanwhile, the actual cost of living has
increased. As a result of the increasing number of women living in poverty in the United States,
microenterprise programs has become a viable option to bootstrap the poor out of poverty.

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Currently, there are over 665 U.S organizations that provide loans and training assistance to
entrepreneurs. It has been estimated that three out of four members of microenterprise programs
are women (Aspen Institute,).
Women entrepreneurs have greatly contributed to the overall growth of the economy. In the United
States, women-owned businesses are the fastest growing business segment with a new womanowned business opening every eleven seconds. The increase in microbusinesses has not only
helped improve the overall economy, it has also helped the women owners become more selfsufficient. A study conducted by the Aspen Institute of several hundred microentrepreneurs in
seven programs across the United States, reported that twenty-five percent were able to climb out
of poverty in three years and almost half had significant increases in both business and personal
assets (To Our Credit).
Therefore, self-employment, or microenterprise, has helped low-income women become
economically dependent in an economy with frequent corporate downsizing, increasing income
inequality, and lower real wages.

THE LAKOTA FUND

In 1974, there was a credit gap of $1.8 billion that existed on the Indian reservations. Since that
time, the availability of credit on reservations has actually declined even further, resulting in the
formation of microenterprise programs on the reservations, such as the Lakota Fund in 1986.
(Mushinski and Pickering, 1996).
The Lakota Fund is a private nonprofit economic development corporation that provides financial
and technical assistance for the Oglala Lakota people in southwestern, in Shannon County, South
Dakota, the second poorest county in the United States. The fund operates out of a village in Kyle,

15

located in the center of the Pine Ridge Indian Reservation. In 1986, the Lakota Fund was created
in answer to a need for capital and technical assistance to help stimulate the private sector of the
reservation, an area of approximately two million acres with a population of roughly 22,000
(Lakota Fund Bulletins).
The Pine Ridge Reservation operates as a centrally controlled economy a welfare state (Lakota
Fund Bulletin). The reservation is an isolated area suffering from severe economic depression.
There are very few businesses and jobs that exist on the reservation. At the time the Lakota Fund
was being organized, there were less than forty small businesses operating on the reservation, and
non-Indians owned most of them. Moreover, roughly seventy-four million dollars were flowing
off the reservation yearly to the neighboring communities due to the declining private sector on the
reservation. Consequently, in 1992, the unemployment rate stood at 95 percent, resulting in many
people living below the poverty line. In 1985, the average per capita income was approximately
$2,367, which was primarily composed of welfare transfer payments. In addition, the reservation
has to manage a high rate of alcoholism among the tribal members of the Lakota Nation.
Therefore, the inception of the Lakota Fund was a blessing for the reservation. At the time of the
Lakota Funds establishment, there were no banks present, and a couple of the surrounding banks
closest to the reservation were charged with discrimination in their lending practices. The only
credit available for microentrepreneurs was their personal savings, loans from family and friends,
and payments made in advance from their customers ( Mushinski, 1996). Since the Lakota Fund
began operating, the number of storefront business on the reservation has increased from forty to
over one hundred. Most of the businesses that have opened on the reservation have received help
from the Lakota Fund, and the majority of the borrowers have been women (Novogratz 18).

16

Overall, the Fund has lent out over a million dollars in loans through its two lending programs
hundreds tribal members to develop small businesses and microenterprises.
From 1986 to 2009, Lakota Funds (www.lakotafunds.org)

made more than 660 micro- and small-business loans totaling over $4.7 million
provided training to over 1,200 aspiring entrepreneurs
created over 1,000 permanent jobs
provided marketing services to more than 1,600 artists and craftsmen
developed the first Native American-owned, tax credit-financed housing project in
America (and now manages a small housing development of thirty homes near Wanblee)
developed the Lakota Trade Center in 1997, a 12,000-square-foot small business
incubator and Tribal Business Information Center and,
co-founded the first Native American Chamber of Commerce on an Indian reservation in
the United States

Initially the Lakota Fund provides financial and technical assistance through two lending
programs: the Circle Banking Project (CBP) and the Small Business Loans (SBL). The Circle
Banking Project was based on the Grameen Bank model, but the Lakota Fund ended the program
1998 due to a variety of issues, which will be expanded on further later.
Originally, the managers of the Lakota Fund shunned the peer group lending model introduced
by Grameen Bank. In 1987, the Lakota Fund made sixty-eight individuals loans, but more than
half of the loan repayments were late and approximately twenty-eight of the money was never
repaid. Therefore, in 1989, the Lakota Fund adapted the peer lending model (Lakota Bulletins)
In 1989, Gerald Sherman, former executive director of the Lakota Fund, founded the CBP lending
program. Sherman was worried about the reservation because the Indian communities had become
accustomed to a grant-like system, particularly the poor. However, charity is not what the
reservation needed to become self-reliant. Therefore, Sherman traveled to Bangladesh to visit
Muhammad Yunus and learn more about the operations of Grameen Bank. He wanted to create a

17

lending program on the reservation that would restore the tribal members dignity and help them
become self-sufficient.
Although the CBP lending program had changed somewhat since its inception since 1989, the
underlying purpose of the program had remained intact. The purpose of the CBP was to provide
an opportunity for both lending and savings to people who otherwise have little access to credit or
savings institutions (Lakota Fund, p 5). The lending program was primarily for home-based
businesses, also known as microenterprises. Examples of the type of microenterprises created by
the Lakota Fund members are quilting, beadwork, cutting firewood, selling wild fruits, and
repairing cars. Since the majority of the enterprises were home-based, the Lakota Fund followed
Grameen Banks method of taking the bank to the people. The employees of the Lakota Fund
would visit the borrowers in their own communities to conduct business. Therefore, the borrowers
never had to leave their communities to be a member of the Lakota Fund (Circle Banking Project).
In order to participate in CBP, four to six members of the same community had to join together to
form a peer-lending group, and the members of the circle could be immediate family members.
The circle members had to attend five training sessions, one training session per week, before they
could apply for, and receive a loan. After the fifth training session, the circle would be certified
and the members decided which two circle members would receive the first loans ranging between
$400-$1,000. The CBP required no collateral to secure the loan, but each group member had to
commit to receive formal training and accept liability for each others loans. As a result,
subsequent loans were dependent upon the successful repayment of any outstanding loans.
Moreover, the circle members also had to commit to regular savings deposits to build up their asset
base (Lakota Fund Reports).

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Normally, the CBP loans had to be repaid within one year, including principle plus fifteen percent
interest. The circle members had to meet every two weeks to make loan payments, discuss each
others enterprises, and also approve loans of group members. If the first two circle members
repaid their loans in a timely manner, every two weeks for six weeks, then the remaining members
would become eligible to receive a loan. If one group member failed to make a payment, then the
other circle members would no longer have any borrowing privileges until the account became
current. Furthermore, if any group member defaulted, then the other circle members were
responsible for paying the loan of the delinquent member; otherwise, the circle would lose all its
borrowing privileges from the Lakota Fund (Mushinski, 1996).
Although the CBP program was created to help the poor generate more income, the loan programs
sole purpose was not to improve the financial lot of the poor; it was also created to foster personal
development. Some of the tribal members suffer from severe lack of self-esteem and high levels
of welfare dependence, therefore the program also helped develop the members self-confidence
and social skills enabling them to be an active participant in the community (Lakota Fund
Bulletins).
The second loan program, Small Business Loans, is primarily geared towards individuals who are
operating small formal businesses or start-ups with a feasible business plan. The business must be
located on the Pine Ridge Reservation and the owner must reside on the reservation as well to be
eligible for a small business loan.
The small business loans are lent out to the borrowers in steps. For example, a first time loan will
not exceed $10,000, and the subsequent steps are $15,000 to $20,000 and then to $25,000, which is
the maximum amount allowed. The first loan of $10,000 has to be repaid within three years,

19

whereas the following steps can be paid back between three to five years. The SBLs are largely
used to purchase a building, equipment, inventory and other related business expenses.
If the business is a start-up, then the individual has to attend the Lakota Funds seven-week training
course, one session per week, to become eligible for a loan. The purpose of the training program is
to teach the members about business management skills. However, individuals who are operating
an established business do not have to attend the seven-week training course as long as they can
provide business and financial documentation for the previous two years or longer.
Moreover, individuals applying for a small business loan must have the following items to be
considered eligible:
Cashflow Statements two years with loan repayment amount included, along
with a breakdown of expenses and income

Credit Application complete with reference names and phone numbers

Debt Ratio complete with all sources of income verification attached

Project Cost information sheet, complete

Collateral and Cash Equity at least fifty percent of the loan amount required
and a cash injection of at least five percent

Credit Consent Form signed and filled out completely with phone numbers
and names of lenders

Business Bank Account with the capabilities of being monitored by the

Lakota Fund and a balance of the required five percent loan request in it

Pre-site Visit collateral inspection with an appraisal form attached and signed

20

Documentation lease agreements, certified title status reports for mortgages,

proof of ownership of vehicles, buildings, brands or anything else securing the
loan

Therefore, individuals have to submit detailed business plans and offer some form of acceptable
collateral to be eligible for the loan. Some examples of the businesses started or expanded with the
use of a small business loan are: hairdressers, artists, video stores and construction contractors.
In addition, the tribal members have access to the Tribal Business Information Center (TBIC)
housed in the Lakota Trade Center with the Lakota Fund. The TBIC uses state-of-the-art
computers, software, video tapes and library materials to assist tribal members and businesses in
efficiency and productivity. Moreover, there are biweekly workshops held on a variety of topics
such as starting a business, marketing, and bookkeeping. Plus, the community can request
workshops according to their own business needs (Lakota Fund Bulletin).
Overall, the Lakota Fund seems to have been successful in helping to stimulate the economy on the
reservation. As a result of the Lakota Funds loan programs, there have been a variety of
businesses set up such as video rental stores, a pawn shop, florist, buffalo ranch, caf, convenience
store, building contractors, hair salons, and an automobile repair garage. The Lakota Fund has a
default rate of approximately 10-12 percent, which compares very favorably with the area banks,
according to Dani Not Help Him, executive director of the Lakota Fund, 2000.
Lakota Fund has had more than a financial impact on the community; it has also had a social
impact on the lives of the tribal members. Dani Not Help Him said the tribal members on the
reservation have many safety nets that they can fall back on . . . [and] We have to stop thinking
about were entitled to and start thinking of what we can do for ourselves (Lakota Fund10).
Consequently, the tribal members have an increased sense of self-worth and have more self-

21

confidence in themselves to become self-sufficient as a result of the Lakota Fund. For example,
whether or not the tribal members actually take out a loan, they gain knowledge on personal
finance, credit, assets, liquid assets, and savings through Lakota Funds training programs.
In addition, the microentrepreneurs on the reservation have a positive impact on their families and
community members. Many of the Lakota Fund members mentioned that realizing their potential
to make and sell things was an empowering experience for themselves and the younger members
of their families, and was a first step toward creating self-sufficiency (Mushinski 161). In other
words, the access to credit on the reservation has a positive ripple impact on the children,
grandchildren, and community members. As a result of both the social and financial impact the
Lakota Fund has had on the reservation, it has become a role model for many other Indian and nonIndian communities (Fact Sheet, Lakota Fund).

RESEARCH SURVEY ANALYSIS OFBORROWERS OF GRAMEEN BANK:

A survey at the micro level was conducted in six villages1 where Grameen Bank operated for 205
households of Grameen Bank borrowers and a Control group of 200 households of Non-Grameen
women. The survey data for this study were collected through interviews with household
members from September to December, 1997.
The objective of the survey was to examine the perception of the women borrowers perception of
the Grameen Bank and its role in their financial success. In particular, to examine and provide
insights into the economic and social effects that this micro lending program had on borrowers.
The survey addressed the social effects of borrowing from Grameen Bank on individual borrowers
hope for education, family planning, self-confidence and overall well-being. Additional questions
in the survey were aimed to address the economic effects, such as financial success, change in

22

annual income and self sufficiency of the borrowers. Also, the survey asked questions about the
borrowers perception of the management of the Grameen Bank and if the participation of the
clients and managers in the loan process were important factors for the success of the repayment of
the loans. The survey also asked questions whether the visions and values of the Grameen Bank
were well defined and were clearly understood by the participants. Lastly and importantly, if the
Sixteen Disciplines substantially influenced their lifestyles. Following are some graphical
illustrations of the results. Please see Appendix for the complete survey.

23

24

The
statistical
results
indicate that
most
women
borrowers
felt that Grameen Bank played a dominant role in their financial successes. Over 93% of the
women surveyed indicated that the bank was responsible moderately to very much for their
financial well-being. Also, majority
of the borrowers indicated that the managers were very effective in the operations of the Bank.
Ninety eight percent of the borrowers also asserted that the bank managers supported them in
obtaining loans. The social interventions represented by the Sixteen Disciplines or resolutions on
better social and healthy practices was implemented for awareness and conscious raising of the
members. The results states that thirty nine percent of borrowers felt that the Sixteen Disciplines
substantially affected their lifestyles and fifty six percent felt it influenced them moderately. The
values of the Bank are embedded n their definition of empowerment and participation in the Bank.
Participation entails being a part of the decision making process of the Bank. Empowerment

25

means sharing control and ability to influence decision-making in the allocation of resources.
(Holcombe, 1995) Fifty eight percent indicated that the participation of managers and clients in
the loan process strongly contributed to the repayment success. Over thirty eight percent felt to a
great extent that the banks vision and values were well defined and practiced by its members., and
fifty nine percent felt this was true and affecting them moderately.
I was also interested in knowing if he borrowing experiences have had any negative social impact
on relationships within the family and in the community. The following charts illustrate
respondents experiences and do not indicate that borrowing from Grameen Bank has led to
adversarial relationships for the borrowers.

26

Overall, the survey results were very favorable toward the bank and the practices of the managers.
These survey results further adds to the body of literature and evidence that the poverty goals of
the bank along with the values of participation and empowerment have led to its success in one of
the poorest countries of the world.

SURVEY RESULTS AND ANALYSIS: BORROWERS AND THE LAKOTA FUND

The researcher wanted to measure both the financial and social impact the Lakota Fund has had on
its women borrowers. The survey, slightly modified, that was based upon a survey conducted by
Aziz (1997-98) with members of Grameen Bank in Bangladesh (Appendix B). In 2000, the
surveys were mailed out and only three completed and mailed back the survey. Consequently, the
researchers traveled to Kyle, South Dakota, to visit and interview members of the Lakota Fund
from 2000 to 2007. Some of the interviews lasted for an hour or more in some cases, which helped
the researcher to gain insight and knowledge which were very meaningful in terms of how
borrowing from the Lakota Fund impact their lives both financially and socially. As a result, we

27

had a total of 76 surveys and the surveys have been used to perform a qualitative analysis for this
research. Please see appendix for the survey.
The survey gathered demographic information from the borrowers, some of which is revealed in
graphs below.

The survey also asked the borrowers about their marital status and living

arrangements, their level of education and whether or not they were currently involved in an
education program. The borrowers were asked whether or not their interest in further education
was a direct result of their involvement with the Lakota Fund.
In addition, the researcher wanted to examine the financial impact on the women borrowers of the
Lakota Fund. As a result, the survey respondents were asked questions in regards to their income
and the results are reproduced in graphs. First, the borrowers were asked whether or not their
income has changed as a result of borrowing from the Lakota Fund. Seventy eight percent of the
borrowers asserted that their income increased after borrowing from the Lakota Fund. The
borrowers were also asked if they received any form of support from others. Moreover, the
borrowers were asked if they believe their wealth or assets have increased after becoming a
member of the Lakota Fund. The ones who responded to the question said their assets have
increased due to a variety of reasons. Some of the reasons are:

Learned business skills

Expanded business, resulting in more customers

Able to purchase materials for business

Able to pay living expenses and afford a larger house

Following are the graphs illustrating the borrowers responses.

28

The survey also asked questions about the lending program the women were participating within
the Lakota Fund. Borrowers were asked if they were currently in peer, or circle lending. About
eight respondents stated that they thought that they were still with the Circle Lending program.
Next, the borrowers who were not involved in circle lending were asked whether or not they had

29

dropped out of a peer group. According to the Lakota Fund and some of the women borrowers, the
Circle Banking Project was suspended as a result of a lack of trust and bonding among the group
members and the burden of others loans. Then, the borrowers were also asked if they had
borrowed from another bank other than the Lakota Fund. Surprisingly, over half of the borrowers
had borrowed from another bank. Some of them who borrowed from another bank other than the
Lakota Fund used the loan money to invest in income generating activities, such as a tanning bed,
bookkeeping/tax preparation business, a vehicle used for business purposes and a machine for the
business. Others who borrowed from a bank other than the Lakota Fund used the loan proceeds
primarily for personal and household expenses.
In addition, the survey asked the women borrowers questions specifically aimed at identifying their
feelings about the Lakota Fund. First, the women were asked if the Lakota Fund played a
dominant role in their overall financial success. Of the respondents, 40% borrowers believed that
the Lakota Fund played a strong role in their financial success, whereas about 32% felt the
organization played only a moderately role to their overall financial success. Second, they were
asked if the managers of the Lakota Fund were effective in running the banks operations. Over 70
% of the borrowers who responded to the question indicated that managers were moderately to
very effective in running the organization. Next, when they were asked if the Lakota Fund
managers supported them in getting a loan, 68% said they received a great deal of support. Finally,
they were asked if the Lakota Funds vision and values are well defined and practice by its
members. Of the respondents, 50% believed the vision and values of the organization were very
well defined and practiced by its members, whereas 13% believe that the vision and values are not
very well defined and practiced by its members and 9% believe the vision and values of the Lakota
Fund are not defined at all and thus not practiced by its members. 50% of the borrowers felt that

30

the participation of clients and borrowers in the loan process contributed to their repayment
success.

31

32

Lastly, the researcher wanted to examine the overall empowerment impact the Lakota Fund has
had on the borrowers. The borrowers were asked if the Lakota Fund has improved their overall
well-being. Of the 77 who responded to the question, 77.6-% believed their well-being has
increased as a result of their involvement in the Lakota Fund. The borrowers indicated that their
self-esteem (64%) has improved and that they have more confidence (75%) in themselves due to
their participation in the Lakota Fund. Regarding more aspirations and ambitions in life after
becoming a member, 67% indicated that they have set higher goals for themselves in life, which is
being passed down to their children. The borrowers in general, have higher educational goals for
their children that they did for themselves.

33

Finally, the borrowers were asked questions about the response their family members, friends, and
community has had to their involvement with the Lakota Fund. Similar to Grameen women, there
were no significantly adverse relationship issues after borrowing from Lakota Funds.

34

35

Conclusion:
The future for the microenterprise field is enormous with more than 2 million low-income
microentrepreneurs just in the United States alone. Microenterprise programs are especially
important for women, whose businesses account for roughly forty percent of all American firms.
Although women-owned businesses usually have fewer than ten employees, they are fueling
economic growth. According to a study conducted on entrepreneurs worldwide by the Kaufman
Center for Entrepreneurial Leadership in Kansas City, countries with high business start ups rates
were enjoying the fruits of prosperity. Moreover, a high start up rate is dependent upon the
participation of women entrepreneurs, who start their own businesses at twice the rate of men.
As the microenterprise field has bloomed in the United States, many of the programs have
attempted to adapt the Grameen Bank model to their own socio-economic conditions.
Some microenterprise programs, including the Lakota Fund, have concluded that peer circle is not
the most efficient mechanism for lending in the U.S. Many participants who have joined peer
group are not ready to take out a loan; instead, they are seeking the emotional support of other
women who are facing similar problems. However, if the women do not borrow money, then the
microenterprise program is not receiving any interest income to support it. Furthermore, the
lending process involved in peer group lending is very cumbersome. For example, the first two
members of the group who receive loans have to make timely payments for a specified amount of
time even before other members of the group can become eligible for a loan. Then, if any of the
group members miss a payment or drop out, the lending process is suspended until the account
becomes current again. In addition, the group members have to share very private financial
information with each other and not everyone is comfortable with that idea.

36

As a result, there is a trend in the United States is to phase out peer lending in favor of direct loans.
The concept of microfinance has adhered closely with novel concept of group lending or circle
lending and some of Grameen Banks practices still survive in some of the U.S. microenterprise
programs. Some microlending programs use Grameen Banks practice of stepping, which means
that microentrepreneurs receive very small loans in the beginning, but those who pay back their
loans in a timely fashion are eligible for larger and larger amounts. In addition, U.S.
microenterprise programs provide peer support programs for their microentrepreneurs and they
accept nontraditional items as collateral such as old car titles and dining room tables.
Furthermore, the market economy in the U.S. is very complex, which calls for more elaborate and
costly training and technical assistance than the Grameen model (Bonavoglia, 2000). The future
for the microenterprise field is enormous with more than 2 million low-income microentrepreneurs
just in the United States alone. Microenterprise programs are especially important for women,
whose businesses account for roughly forty percent of all American firms. Although womenowned businesses are growing twice as fast as all businesses, usually have fewer employees (10 or
fewer), they are fueling economic growth. According to a study conducted on entrepreneurs
worldwide by the Kaufman Center for Entrepreneurial Leadership in Kansas City, countries with
high business start ups rates were enjoying the fruits of prosperity. Moreover, a high start up rate is
dependent upon the participation of women entrepreneurs, who start their own businesses at twice
the rate of men.
According to the Aspen Institute (2009), there are approximately 696 microenterprise programs to
assist the more than 116,944 low-income microentrepreneurs. As the microenterprise field has
bloomed in the United States, many of the programs have attempted to adapt the Grameen Bank
model to their own socio-economic conditions.

37

The Lakota Fund concluded that peer circle is not the most efficient mechanism for lending to lowincome men and women. Many participants who had joined peer group are not ready to take out a
loan; instead, they are seeking the emotional support of other women who are facing similar
problems. However, if the women do not borrow money, then the microenterprise program is not
receiving any interest income to support it. Furthermore, the lending process involved in peer
group lending was perceived as cumbersome. For example, the first two members of the group
who receive loans have to make timely payments for a specified amount of time even before other
members of the group can become eligible for a loan. Then, if any of the group members miss a
payment or drop out, the lending process is suspended until the account becomes current again. In
addition, the group members have to share very private financial information with each other and
not everyone was comfortable with that idea.
As a result, the trend in the United States is to phase out peer lending in favor of direct loans.
However some of Grameen Banks practices still survive in some of the U.S. microenterprise
programs. For example, some microlending programs use Grameen Banks practice of stepping,
which means that microentrepreneurs receive very small loans in the beginning, but those who pay
back their loans in a timely fashion are eligible for larger and larger amounts. In addition, U.S.
microenterprise programs provide peer support programs for their microentrepreneurs and they
accept nontraditional items as collateral such as old car titles and dining room tables.
Furthermore, the market economy in the U.S. is very complex, and needs more elaborate and
costly training and technical assistance than the Grameen model. For example, low-income
microentrepreneurs are competing against large corporations and firms that are very well
established and have a dominant presence in the market economy. Furthermore, government

38

regulations, taxes, licensing, and welfare laws also complicate the process of helping low-income
microentrepreneurs become economically self-sufficient in America.
However, microentrepreneurs help stimulate economic development within their communities by
building a stronger economy and encouraging communities to help themselves. Even though
starting a small business should not be considered a quick rich scheme because it takes endless
hours and years of dedication and hard work and typically provides an income at the low end of
middle class. Furthermore, microentrepreneurs who participate in a lending program, particular
women, become more confident in themselves and have more self-esteem, so even if their business
does not succeed, then they move on to bigger and better things rather than falling back on welfare.
Women will take advantage of microenterprise programs because low-income are have very
limited choices and opportunities. They tend to be put in low-wage, low-advancement jobs where
their talents and skills are not considered (Bonavoglia, 2000).
Moreover, microenterprise programs are helping benefit the children of microentrepreneurs. The
children, who have lived a life in poverty and dependence on the government, are growing up in a
different environment, learning about the concept of business, and some of them are even talking
about starting their own businesses eventually.

Overall, microenterprise programs are a viable alternative to welfare to help low-income

individuals, particularly women, climb out of the vicious cycle of poverty (Aziz 2002).
Microenterprise programs help women become financially independent, which also helps stimulate
economic development within their communities because the micro-enterprises create jobs for
other residents in the neighborhood. Obviously, more research and government funding is needed
in order to examine the sustainability of microenterprise programs as well as set guidelines for

39

these lending programs, but in the meantime, it is important to note these program have had a
positive impact on women and children and have given them the courage and strength to help
themselves become self-sufficient.

40

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