Microfinance in America: An Update
October 29, 2013 § Leave a comment
by Katherine Danesi
Four years ago, I wrote a post, “Microfinance in the United States – A Brilliant Idea Whose Time Has Finally Come?“, based on my fervent belief that if microlending initiatives could work in third-world countries, there was no reason they could not be adapted to work here.
In the intervening years, the microloan programs mentioned in the post have expanded and multiplied, and hundreds of millions of dollars have been lent giving tens of thousands of borrowers the opportunity to earn a living. And there have been detractors who argue that the results cannot be accurately measured and are not what they seem. Maybe, but maybe not.
Today, The New York Times published a piece by reporter Shaila Dewan titled “Microcredit for Americans.” She shared her article via Twitter (@sheiladewan) with the tweet: “How the U.S. is embracing a third-world approach to poverty.”
While there are a number of reputable and successful microlenders in the United States, her article focuses on Grameen America, launched in 2008 by Bangladesh-based Grameen Bank, whose founder, Muhammed Yunus, conceived of microloans as a way to help lift his country’s citizens out of poverty. Mr. Yunus’s belief being that a need existed, and still does exist, in America. In the Times, Ms. Dewan writes:
“Families in rural Africa are more like U.S. families than everyone wants to believe,” said Jonathan J. Morduch, the executive director of the Financial Access Initiative at New York University, who has studied microcredit and is taking a close look at the financial lives of low- and moderate-income Americans. “The hidden inequality in America is about fundamental security, the ability to plan.”
In the United States, microcredit has generally been defined as loans of less than $50,000 to people — mostly entrepreneurs — who cannot, for various reasons, borrow from a bank. Most nonprofit microlenders include services like financial literacy training and business plan consultations, which contribute to the expense of providing such loans but also, those groups say, to the success of their borrowers.
What, then, does microcredit for Americans enable?
- Access to capital at rates far below those of payday loan operations (the go-to lender for the “unbanked” and those with low or no credit scores).
- The ability to increase income, usually in an entrepreneurial endeavor.
- Skills to “exercise responsible financial behavior”.
- Education regarding best practices for running a business.
- Encouragement to save and to seek preventative health care.
- The opportunity to build a healthy credit score to reduce their costs and move into mainstream banking.
This last point is critical and one that is often lost on those who’ve not experienced being outside of the banking system:
Grameen helps its clients in another way that many experts say is more important than increasing income — it establishes good credit scores. Many poverty alleviation groups have shifted their focus from saving to credit building, because people with poor or no credit must leave large deposits for basic needs like utilities, have trouble renting decent housing, pay much higher interest rates and have a harder time finding jobs.
As noted on the Grameen America website: Small Loans, Big Impact. Microfinance in America, it’s day has come.