Opportunity Bank microfinance model and Grameen Bank comparison

Microfinance

My project is to open a microfinance bank, which specializes in low value, non-collateral loans for small business, typically in underprivileged parts of the world (Opportunity.org, 2013). This will open in New York, serving people in the city's poorest communities, especially those struggling with unemployment. In some parts of the city, the annual median household income is below $10,000, and people in those communities become trapped in poverty (Venugopal, 2011). Microfinance was instituted by Grameen Bank in Bangladesh by Mohammed Yunus, who won a Nobel Peace Prize for the project (Grameen, 2013; Nobelprize.org, 2013). The project would utilize funds raised in New York's banking community to provide loans for people in New York's poorest areas, and to provide business skills training to help them to improve their earnings and standard of living.

Model and Competition

The business model of microfinance is different from that of a conventional bank. Microfinance does not aim to maximize profits for its shareholders but to maximize opportunity for its customers. The financiers of microfinance typically earn a nominal return on their investment, while most profits are plowed back into more lending, which helps to grow the bank. It is necessary, however, to strike a balance between community and commercial objectives (Lutzenkirchen, 2012). Microfinance has been utilized throughout the developing world, in nations where the conventional banking systems do not deal with small borrowers. However, if growth is too fast, the quality of the borrowers declines, leading to crisis in the microfinancing industry (Chen, Rasmussen & Reille, 2010).

The business model is structurally similar to that of other banks. The bank must first raise money, something that can be done through small scale donations from New York's financial community. There should not be any shortage of people to lend to as well, and they must be vetted by the bank. The United States is a relatively untapped market for microfinance, with none of the top 50 firms located in the country (Swibel, 2007), however, as its banking system is considered sufficiently robust to handle most customers. Citigroup (2013) has become involved in microfinance and online lender Kiva (2013), which takes a lot of donations from the U.S., has started lending to American entrepreneurs as well. There are also a variety of crowd-funding websites that provide similar opportunities and would compete with the new venture for quality businesspeople who need money, and for donations from Americans.

Strengths and Weaknesses

There are a number of strengths to the model. The first is that New York's poorest areas are still full of entrepreneurs, creating significant opportunity. That there is little competition only enhances this opportunity. Many in the city's immigrant communities will already be familiar with the microfinance concept. Low interest rates (Bloomberg, 2013) mean that the initial funding for the project can be acquired at low cost.