02 November 2010

microfinance in macro economies

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.


  1. If you factor in the cost of capital and administrative costs, micro-finance as it is practiced in the developing world is a charitable effort. In the developed world, small loans to fund micro businesses are fairly easily available from a social network, such as an elderly uncle with a little money in the bank and a pension. It's also available from places like pawn shops and payday lenders. In the developed world, the problem of the poor isn't a lack of access to capital. Instead, issues confronting would-be entrepreneurs revolve more around the increased costs and profitability barriers involved in "going legit". For example, a woman may make a little money by braiding hair. But if she gets too many customers she may need a store front or neighbors might complain and registering a business takes time and money (not to mention exciting the IRS). And if she gets a tiny shop, various government bodies may start insisting she meet various health codes and charge sales tax that then has to be deposited with the state. And heaven forbid if she then wants to hire employees, because then she starts facing minimum wage laws, withholding requirements (including on tips), OSHA, signage requirements, etc.
    Micro-finance is a solution to a problem that doesn't really exist in the developed world. Instead the problem is one of helping people overcome these obstacles and see the way forward to how it can justify all the up-front costs.

    To demonstrate the difference, imagine what it would take to buy 5 goats and open a small dairy selling cheeses in a developing country and in the US.

  2. Its true. The cost of doing business is so much higher than in other countries. On the goat example - that's sort of my thought as well. With Walmart as pervasive as water, how can micro enterprises even stand a chance ?

    That being said, there has to be a way for us to adapt the model to the US. Maybe help does not only come in the form of financing but other means like access or consulting. There's very few efforts i've seen here, so maybe its be tried to no avail.

  3. Interesting prospective my friend. I think the biggest problem for microfinancing in an economy like US is everyone's apetite to be bigger and better. The willingness to put the effort forth to get "micro" amounts does not exist. But you are right that the model can be adapted in many forms..