Microfinance works. But can it in the US?
First off, I've always felt business-based principles are the best way to solve the world's problems in the long-term, and certainly microfinance has done its part. Bangladeshi economist Muhummad Yunnis revolutioned how we alleviate poverty by bringing microfinance to the masses in 2006 with the launch of the Grameen Bank (and he won the Nobel Peace Prize too). He created a system that provided loans to the poorest of the poor who had no access to capital, built sustainable small businesses around the world, facilitated oppressed women to gain financial freedom, and allowed financial instititutions to at least break even if not turn a profit. The net impact has been a self-sustaining model that has lifted millions of people out of poverty through a free enterprise, non-entitlement based system. People pay interest, face default penalties, but more incredibly, actually pay their loans off at a higher rate than traditional borrowers.
Despite the negative things you hear (ie. last week's news that the Indian state Andhra Pradesh's government placed a moratorium on repayments), by and large it has worked. The biggest drawback has been its reach. In emerging countries like India or Brazil which are capitalistic-centric, politically stable, and possess a self-contained economy, it has worked quite well. India itself is on pace to see $4B this year in microloans. That is alot when you consider most loans are less than $200. Culturally, the concepts of loan repayments are not novel and small businesses are the norm not an exception. In other places, it has been harder and less effective. Particularly in Europe and the US where the economics have just not worked out on a large scale.
I was happy to see last week one of my favorite microfinance efforts Kiva, announce two new microfinance initiatives in the US. For those that dont know Kiva, it is the ebay of microfinance (founded by former paypal execs): it allows anyone to make a loan around the world via an easy online transaction, track an entrepreneur's progress, and offers more visibility than has ever been offered through its rating system and grass roots due diligence. Transparancy and ease, my two favorite pillars.
But can microfinance work in the US? Kiva and Accion are offering microloans to fisherman and others affected by the BP spill. Is big business too prevalant for it to work on a large scale? How is a small loan going to really help someone in the long-term (versus a simple charitable donation) ? Does the math of a $200 loan just not work in high cost of living jurisdictions? Do we need specialty microfinance institutions from abroad who have the expertise to make it work at home ? I'm not sure what the answer is - but surely if it can work in poor areas of Asia that we have enough creativity to make it work in poor areas of the US. With the US economy facing a prolonged downturn, perhaps what we need most is for small, innovative businesses to grow and thrive when government and corporations cannot fill the gaps.