Microfinance in the United States – A Brilliant Idea Whose Time Has Finally Come?

October 19, 2009 § 2 Comments

“Microfinance offers poor people access to basic financial services such as loans, savings, money transfer services and microinsurance. People living in poverty, like everyone else, need a diverse range of financial services to run their businesses, build assets, smooth consumption, and manage risks.” CGAP

A little over a year ago, I came across a number of articles regarding the success of sustainable microfinance programs in the developing world.  Whether it was in Bangladesh (with one of the first and most extensive programs provided by the enterprising and innovative Grameen Bank) or any number of countries in Africa and Southeast Asia, these programs were working: entrepreneurs were being funded; loans were being repaid and then, often, taken out again to expand the new businesses; and they were having a measurable impact on the income and, hence, quality of life of the entrepreneurs, their families, and the communities in which they live.  These individuals were given an opportunity to climb a rung on the economic ladder and they grabbed it.

Curious, especially because of the recession, I began to research the micro-lending offerings in the United States.  I thought that if these types of programs were successful elsewhere, that there must be a robust microfinance movement here as well, and I had just not heard about it.  But this was not the case.

While millions of dollars were flowing through vehicles like  Kiva.org (“Kiva connects people through lending to alleviate poverty”) to extremely enterprising and well-deserving people in the aforementioned countries, I did not get the sense of a microfinance “movement” here.  After some further digging, I found a few very successful micro-lending organizations, like Accion USA and Opportunity Fund, that were doing good work, but they did not appear to have the same level of broad economic impact.  And, frankly, who had heard of them?  Reading further, it seemed that U.S. financial regulation and the legal complexity of starting a business were largely to blame, as were the start up costs for new businesses in the States versus third world countries.  I was left thinking, yeah, but … is there not a way around the bureaucracy?  Even if the costs are higher, how does that negate the need?  Doesn’t it make sense to try?

Then, after getting caught up in other, more mundane matters for a few months, the subject of microfinance in the U.S. crept into my consciousness again this year:  credit had grown tighter with both banks and the SBA lending significantly less money to small businesses than in previous  years; these small businesses, which employ over half the country’s private-sector workforce, were being hamstrung in the process, cutting employee hours, and often, entire jobs as well; hundreds of thousands of jobs were disappearing each month at large corporations; and there were now 37 million people (12.6 per cent) in the United States living below the poverty line, 60 per cent of which were women.

Then, some “crocuses.”  A Seattle Times article caught my attention in January of this year: “Can micorfinance work in the United States? In the article, Kristi Heimes described a Seattle-based non-profit called Washington CASH which acts as a go-between for the Small Business Association (SBA) and low income borrowers, grouping them together to make loans and providing training to help them succeed.   And I discovered that the Grameen Bank did operate in the United States: Grameen America, launched in Jackson Heights, Queens in January 2008 and later in Omaha, Nebraska, was having a marked impact in the local communities.  “As of September 30, 2009, Grameen America has disbursed over $2.9 million in loans to over 1,350 borrowers. Grameen America currently maintains a repayment rate of over 99%.”  This seemed promising.

Further, on June 10, 2009, Kiva announced that they were launching their online micro-lending platform in the United States.   According to Premal Shah, President of Kiva:

“Kiva’s micro-loan model is extremely relevant to low-to-moderate income, U.S. based entrepreneurs, especially given the current economic conditions which makes access to credit a very real problem. The Internet could become a significant source of community driven, low-cost capital for the everyday small business owner in the U.S., and Kiva.org is excited to expand its platform to the U.S. at a time when the need for such capital is greatest.”

As detailed in their press release, the motivation to expand to the States was provided by California’s First Lady, Maria Shriver.  During a visit to the Kiva office in San Francisco, she asked if the model that had been so successful in the developing world could work in America for low and moderate income earners.  As a champion of women’s rights and opportunities, Ms. Shriver lauded the launch of the U.S.  program, stating, “By pooling our resources, a loan as small as $25 can change a life.”

Kiva has partnered with Accion USA and Opportunity Fund to facilitate the initiative.   Earlier this month, they sent out a newsletter celebrating four years of successfully connecting borrowers and lenders, at this point largely in the developing world.   Some of the “Kiva Fast Facts” included in the email were:

$94,606,985 raised with a 98% repayment rate

235,482 entrepreneurs funded in 183 countries

576,502 lenders from 185 countries each lending, on average, $168.54

$402.57 was the average loan size (some were group loans)

82.73% of loans were made to women entrepreneurs

Enter Tory Burch.  I found a brief mention of her foundation online last week and was curious about its focus.  When I visited the Tory Burch Foundation web site I was impressed.  The foundation’s mission statement is to provide “economic opportunities to women and their families in the United States.”

As Ms. Burch explains on the foundation’s site, she conducted extensive research into programs in other countries and realized the opportunity she had to contribute “by working to economically empower women and their families in the United States.”   Then she settled on microfinance as the first area of focus.

On The Daily Beast’s “Giving Beast,” Ms. Burch wrote:

“The need for microfinance is enormous. Only 2 percent of people who could benefit have access to microfinance services in the U.S., vs. 17 percent in developing countries. The sad reality is that a low-income entrepreneur in a developing country may have a better shot at accessing a small business loan than a low-income entrepreneur in the U.S. It defies logic.”

Ms. Burch’s focus on women makes sense.  As the Kiva statistics demonstrate, the majority of loans made to date in developing countries have been to women.   In the United States, the need is equally as urgent:

“Poor women are most likely to be micro-entrepreneurs or self-employed.  These entrepreneurs support their families and are the front line investors in their communities.  They are more likely to be denied a loan by a traditional bank and face higher levels of financial discrimination.”

The Tory Burch Foundation has also partnered with Accion USA.  As she explained, most U.S microlenders process 25 to 30 loans  year, whereas, Accion processes 50 to 60 per month.  Since its inception in 1991, Accion has loaned $117 million in 18,500 microloans ranging from $500 to $50,000.  As on the Kiva.org site, you can meet Accion’s borrowers on their site, as well.  Further Accion has partnered with Kiva so that individuals can lend directly to Accion borrowers in North America.  I believe the one-to-one connection: watching the funding progress and seeing where your money is going – to whom and for what purpose – is a large part of Kiva’s success.

With the attention brought to this issue with the domestic launch of Kiva.org  and the focus of the Tori Burch Foundation, and the commitment of micro-lenders like Accion USA, Opportunity Fund, and the Grameen Foundation, I am convinced that a larger number of individual lenders, like you and me, will fund borrowers “at home,” as well as abroad, and, equally as important, that more entrepreneurs will be made aware of the possibility of borrowing funds to start or expand their businesses, so they too can take advantage of the opportunity to climb a rung on the economic ladder.

I believe change coming.  The microfinance movement may just be taking root in the United States of America.  Isn’t it about time?

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