More On Microfinance in the United States

UPDATE:  After reading this post, jump over to NSBW: U.S. Microfinance – Making a Difference, which was written in June 2013 to coincide with National Small Business Week.

Since I prepared my first post regarding the emergence of microfinance offerings in the United States, I’ve had the opportunity to attend the North American Conference on Microfinance and have learned more about the need for and challenges facing the success of these programs in North America.  I’ve omitted the inspirational success stories, as this post is already overly lengthy, and you will find numerous examples of microfinance making a difference when you visit the sites of the organizations listed at the end.

First the need.  According to the most recent U.S. Census figures, there were over 40 million people living below the poverty line in 2008, over 17 million of those living in deep poverty (households earning less than one-half the poverty level threshold).  Women make up more than half of the poor, as do a disproportionate number of immigrants.  Further, according to the U.S. Department of Agriculture, almost 50 million people had trouble obtaining enough food to eat in that same year.  It does not take much to make the leap that these numbers worsened in 2009, as the unemployment rate stubbornly hovered around 10%.

It is clear that the country needs jobs to break this cycle.  In his recent article, “Coming Soon: Jobs! Why employment will rebound sooner than you think,” Slate columnist Daniel Gross writes that “some recent data points, and an understanding of the behavior of companies at different phases of the business cycle, suggest we’ll have job creation sooner rather than later.”  But he posits that we should not expect new jobs to come from the Blue Chip companies who have contributed significantly to the layoffs of the past two years.  Rather, we should look to new, most often small, businesses for meaningful job creation: “According to a new study from the Kauffman Foundation, companies less than five years old created nearly two-thirds of net new jobs in 2007. Growth will come from the two guys subletting an office suite in Palo Alto who may be creating the next Google, or from the hole-in-the-wall Mexican spot that could be the next Chipotle.”

Which leads to the need for increased financing for small businesses.  The reality is credit remains tight even for those with collateral and good credit scores, and is non-existent, barring the use of moneylenders charging exorbitant rates, for those without any access at all to banking services.  Today’s domestic microentrepreneur could be a small business owner with no current access to capital, or an “unbanked” person, of which there are 28 million such people with no bank accounts whatsoever, and an “underbanked or underserved” individual, of which there are nearly 45 million with only limited access to financial institutions.  For those in the latter two groups, getting into mainstream banking in order to gain financing is made more difficult by the U.S. credit rating system.  The poor, often immigrants, are caught in a “Catch-22,” as they don’t have credit ratings and are not able to obtain as they don’t meet the rating requirements.  The need for change is obvious.

Now to the challenges.  Inherent in the transition of microfinance initiatives from Third World countries to North America are changes to the model.  First, in order to make an impact, the loan sizes tend to be larger.  ACCION USA, the largest domestic microfinance organization, indicates that their average loan size is $5,100.  While the San Francisco-based Opportunity Fund will lend as little as $1,000 and as much as $10,000, for a first round.  And the Foundation for Women (FFW) starts with loans of $250, then progresses to $500 and $1,000 with each successful round of repayment.  IT is encouraging that the model has been adapted by domestic organizations to meet the needs of entrepreneurs through a broader spectrum of offerings.

The next critical factor is the deployment of a group (or peer) lending model versus an individual lending model.  The origin of micofinance is Nobel Prize winner Mohammed Yunus’s “Grameen Lending Model” which is founded on peer lending.  It has worked exceedingly well in developing countries where repayment rates are in excess of 98%.  In North America there is the belief that borrowers are resistant to this model, where all members of a group are voluntarily responsible for repayment of each member’s loan.  For this reason ACCION USA chose an individual lending model.  On the other hand, Grameen America has stayed true to its roots with group lending, and this model has been adopted in its entirety by the Foundation for Women.  Lesson: what people are willing to take on may depend on their circumstances and the way in which the program is executed.  The group lending model, while not the ideal scenario for most Americans, may be made more palatable as a rung on the ladder, that first step.

Because of the almost total lack of access to financial institutions in the Third World, microloans there are made on a merit basis.  The peer groups are kept small – typically five women – and new members are permitted by invitation only, with a current member “vouching” for the new prospect.  In the Western world, this has resulted in a spectrum of program requirements, starting with the  loans for the “unbanked” with no credit history and little or no collateral (FFW, Grameen, Opportunity Fund) to those requiring a credit history and/or collateral (ACCION USA).

What all of the programs do have in common is the requirement for savings and the building of a credit history.  The most creative initiative is the “passbook” that is created for a FFW borrower.  Each successful round of repayment is recorded in the passbook.  After a minimum of three rounds, a loan of up to $1,000, the borrower “graduates” to the ACCION USA program with passbook in hand as the first step in building her credit rating.  Grameen has been innovative in this area as well, partnering with Citibank to offer low cost savings accounts and capturing successful repayment for eventual reporting to credit agencies.

The goal of a microfinance organization is to become profitable and, therefore, sustainable.  In Third World countries, when this has been achieved, it has been through the sheer number of borrowers (scale) and high interest rates.  In North America, the challenge is to find a way to cost-effectively scale operations (including outreach and loan approval) while charging rates anywhere from 15 – 20% (lower than charged abroad) in order to become sustainable without donor contributions.

An excellent article published last month on Time.com, “Can Microfinance Make It in America?” addresses this issue head-on.  The piece focuses largely on Grameen America, which was opened its first branch in January 2008 and in less than two years has leant over $3 million to over 1,500 borrowers, most in the New York metro area.  Grameen founder Mohammed Yunus thinks that it’s possible.  He told Time.com he “believes that in just a few years Grameen America will be so successful that it turns a profit, thanks to 9 million U.S. households untouched by mainstream banks and another 21 million using the likes of payday loans and pawnshops for financing.”  It remains to be seen whether his prediction is manifested.  ACCION USA is close, but not quite there, and they’ve been operating for almost 2o years.  The Foundation for Women has gotten creative in its efforts to attain sustainability (see their profile below).  And, the Samuel Adams program is funded by the Boston Brewing Company.

Further, there is a slowly developing movement towards the concept of “social investing.”  The investor receives a “dual return”: a modest financial return (usually around two percent) and an emotional return, knowing that he or she helping to alleviate poverty.  One of the largest sources of private funding for microfinance institutions (MFIs) is Oikocredit, a global cooperative that raises money  by selling low-yield instruments in Western Europe and North America.  They do not currently fund MFIs in North America, but that may change, or their approach may catch on with other such organizations. Perhaps, like all of the characteristics of microfinance delivery in America, there will be a range of funding initiatives that make sustained success possible.

Lastly, but by no means less important, are partnership and mentoring: partnership between large, centralized organizations and local, on-the-ground groups who help with program out-reach and delivery; and, mentoring to educate and provide moral support to borrowers.  Both are critical.  Outreach is an ongoing effort for which community knowledge is essential.  Training programs, one-to-one advice, and encouragement have proven to be vital to the repayment of loans and business continuance.

Microfinance is an incredibly important and complex subject, and, while no means an expert, I am passionate about the movement and its prospects in North America.  It was my intention to provide enough detail to get your attention and peak your interest.  As much information as I’ve included here, I’ve omitted even more.

Whether you are in a position to help or are in need of a loan, here are the basics for the organizations making an impact in the States:

Accion USA – “As a leader in U.S. microfinance, ACCION USA is committed to bringing affordable small business loans to microentrepreneurs.  ACCION USA has provided over $119 million in over 19,000 microloans since inception in 1991.”   Loans range from $700 – $50,000 using an individual lending model.  The direct lending offices are located in New York, NY; Miami, Fl; Atlanta and Savannah, GA; and Boston, MA.  Loans have been issued in 46 states through an online loan applications and local affiliates.  Financial Education Workshops are held in the five cities where ACCION USA has offices.  A variety of assistance programs and training are available in other cities through its network of partners,

Foundation for Women: Eliminating Global Poverty Through Microcredit – Funds and creates microcredit programs around the world based on the Grameen model (small loans of $250, $500, $1000, group lending, forced savings).  Based in San Diego, they serve the local market and are looking to expand to other U.S. cities.  Sell Micro Loan Blend Coffee to help fund the loan pool.

Grameen America:  Banking for the Unbanked – A “microfinance nonprofit organization that provides loans, savings programs, credit establishment and other financial services to entrepreneurs living below the poverty line in the United States.”  As mentioned above, they use their founder’s group lending model.  See my post regarding the new documentary, To Catch a Dollar: Mohammed Yunus Banks on America, which had its world premiere at the 2010 Sundance Film Festival.

Kiva.org: Loans That Change Lives – “Kiva’s mission is to connect people through lending for the sake of alleviating poverty. Kiva is the world’s first person-to-person micro-lending website, empowering individuals to lend to unique entrepreneurs around the globe.”  Launched in the United States in June 2009 to fund American microentrepreneurs.  Partners with local microfinance institutions.

Opportunity Fund: Working Capital for Working People – A microfinance nonprofit that “advances the economic well-being of working people by helping them earn, save, and invest in their future.”  Provide Small Business Loans, Individual  Develop Account (IDA) matched savings accounts, and Community Real Estate Lending in the San Francisco Bay Area.  Partnered with Kiva.org (microfinance) and SaveTogether (matched savings).

Rotarian Action Group for Microcredit: Ending Poverty Together One Small Loan at a Time – Help Rotary Clubs launch microcredit projects quickly, easily, and with measurable results.  Partner with various microfinance organizations based on location.

Samuel Adams Brewing the American Dream – Established in June 2008, is a “program to support low and moderate income entrepreneurs in the food and beverage industry.”  Provide loans of $500 – $25,000.  Conduct business literacy and financial literacy seminars, and mentorship.  Partnered with ACCION USA.

The PLAN Fund: Capitalizing on Character – Is a non-profit organization established in 1999 which “combines entrepreneur training classes, support services and micro-loans to start-up and existing businesses at … business centers in Dallas.”  Average loan size is $1,500; loans range from $500 – $6,000.  Was founded as the U.S. incubator for the Grameen Foundation.

Tory Burch Foundation – “provides economic opportunities to women and their families in the United States.”  Raising awareness of poverty and microfinance as one solution.  Partnered with ACCION USA.

And if you’re in the San Francisco Bay Area, or are interested enough to make the trip, the Microfinance USA 2010 conference is scheduled for May 20-21st at The Westin San Francisco and the Yerba Buena Center for the Arts.  The keynote speaker is Maria Shriver, First Lady of California.

These are not normal times and, as such, require ab-normal, unusual, exceptional solutions.  I believe that microfinance can be a piece of the extraordinary.

Money and mentorship can equal the opportunity for self-reliance.