Microlending: Not Just for The Rest of the World

CashThe word “microlending” makes most of us think about faraway places. Kenya. The Philippines.  Peru. And that perception would have been justified just a few years ago. 

But not anymore.

As the Shriver Center’s 2012 Poverty Scorecard makes abundantly clear, America desperately needs innovative solutions to poverty. For low-income Americans whose lives could be improved by small amounts of capital to start or improve a small business, microlending might be just what they need.

Microlending was born in Bangladesh, where an economics professor named Muhammad Yunus started making small loans to poor women in the 1970s. Yunus focused on women in rural areas because they had little or no access to traditional banks, and because he found that women were more likely to spend the money on their businesses or their families than men were. Yunus went on to found Grameen Bank. Today, in Bangladesh, “the Grameen Bank has 8.4 million borrowers, 96 percent women.” In 2006, Yunus and Grameen won the Nobel Peace Prize.

Yunus’s idea has spread far beyond Bangladesh.

A major player in microlending’s growth across the globe has been Kiva. Kiva is an online platform that allows individuals or organizations to make small loans (in $25 increments) to borrowers around the world who do not have access to traditional banking services. Kiva lenders can choose to support any kind of small enterprise—from furniture-making to farming to crafts. Kiva does not make its loans directly. Instead, Kiva sends the money directly to local microfinance institutions (MFIs). MFIs are local banks, credit unions, and other organizations who then interview and select the individual borrowers that receive Kiva funds.

A major part of Kiva’s success is that it allows lenders to feel personally connected to borrowers. Lenders read profiles of individual borrowers on Kiva’s website and can decide whether they would rather lend to a farmer in Lagodekhi, Georgia, who would like to purchase a car to drive as a taxi, or an entrepreneur in Medellín, Colombia, who wants to purchase more merchandise for her small business selling pet supplies. Notably, lenders can also evaluate the strength of the MFI involved in the loan. Each MFI that Kiva works with has a “risk rating,” and Kiva also gives “social performance badges” based on the MFIs’ success in seven key areas. Most importantly, Kiva works. As of April 24, 2013, Kiva’s repayment rate was 99 percent.

In 2009, Kiva started making loans to U.S. borrowers in addition to those it was making  in developing countries. Although some longtime Kiva users formed a new lending group, called Pissed Off Kiva Lenders, because they felt that Kiva’s mission should remain focused on developing countries, Kiva (and most of its lenders) recognized that there are plenty of low-income people in the United States without access to banking services who need help.

As Kristina Shevory wrote for the New York Times back in 2010, the one-two punch of tight credit and the recession has made microfinance a very appealing option for American borrowers. Shevory describes a San Jose, California, hot-dog stand owner who would have lost her business without the $6,500 she borrowed from Kiva at 6% interest. She had been rejected by several San Jose banks when she applied for a conventional loan.

Moreover, in the wake of the foreclosure crisis, microlending programs’ traditional focus on financial education is particularly important for Americans. Many MFIs require borrowers to take classes in financial literacy, and many also offer optional classes on topics ranging from HIV/AIDS awareness to domestic violence prevention.

Microlending is not an answer to every problem. As discussed in the impeccably researched and frequently hilarious book, The International Bank of Bob, which documents the author’s travels to meet Kiva borrowers, the growth of the microlending industry has led to some abuses. In places like Andhra Pradesh, India, a few MFIs that began focusing on profits issued loans with extremely high interest rates and gave individual agents bonuses to sign up high numbers of clients. The result? Borrowers receiving loans that they could not repay. Grameen Bank itself has also had problems, with the Bangladeshi government pushing Yunus out of his job as head of the bank in 2011 and repeatedly trying to malign Yunus and to gain control over Grameen’s assets.

The good news is that microlending organizations have learned from the Andhra Pradesh crisis and added safeguards that make microlending safer. For example, a group of microfinance leaders formed The Smart Campaign to protect microlending clients and keep the industry “both socially focused and financially sound.” More than 1,000 MFIs have endorsed the campaign’s Client Protection Principles, and earlier this year the campaign began a new certification program.

In the United States, federal and state governments are continuing to recognize the potential of microlending. As Shevory wrote in 2010, the economic stimulus bill gave $54 billion to the Small Business Administration for “lending and technical assistance to microlenders.” Now, the SBA’s microloan program provides loans of up to $50,000 to “help small businesses and certain not-for-profit childcare centers start up and expand.” Like Kiva, the SBA does not administer its loans directly; prospective borrowers must apply through SBA-approved intermediaries. The U.S. Department of Agriculture also began a microloan program for young and beginning farmers earlier this year, signaling that more agencies may follow this path.

Several cities have created their own microlending programs. New York City’s NYC Capital Access Loan Guaranty Program is a public-private partnership that assists small businesses “experiencing difficulty accessing conventional bank loans to obtain loans and lines of credit up to $250,000 for working capital, leasehold improvements, and equipment purchases.” Detroit, Michigan; Reading, Pennsylvania; and Stockton, California also administer microloan programs for small businesses.

One of the 2012 Poverty Scorecard’s key findings was that “[i]n 2012, Congress did virtually nothing to advance justice or opportunity for the 46 million people living in poverty in the U.S.”  Going forward, microlending may be an anti-poverty tool that both private citizens and the government can use to help low-income Americans succeed.

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Daniel - June 1, 2013 12:43 PM

This is encouraging. We keep hearing that there is money to be made providing financial services to people with low incomes, so it's good to see that getting put to the test. It certainly seems to me that with the big banks being hyperconservative, there should be some room for money to be made by less finicky lenders - while helping people who need access to credit.

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