Learning from Microfinance in the U.S.

NPR ran a story yesterday about a group of Bentley College students who are the first campus group to pursue microfinance lending in the U.S. Microfinance is known generally as a developing world model of building small businesses, credit and self-sufficiency, especially for low-income women.  It's been harder to roll out in the U.S., given our comparatively regulated business climate, higher financial costs of doing business, and individualistic, mobile society.

But Accion USA, the domestic arm of a decades-old international microlender, has been making micro loans in the U.S. for almost 20 years.  So what's the big deal about these students pursuing domestic microlending, other than the obvious learning opportunity involved?

I'm not sure, and maybe the social entrepreneurship opportunity is enough.  But it's an interesting case for anti-poverty advocates to think about, given it's illustration of the reality of being a very small, struggling business owner in this country.

I used to work in small business development in low-income and post-disaster urban communities.  In a low-income context, entrepreneurship or small business creation is often a "patching" process - i.e., entrepreneurs go into business for themselves in addition to holding down jobs, as a means to supplement low wages.  Like low-income households, many of these entrepreneurs are "unbanked," lacking the proper credit to get loans from traditional banks, or avoiding the traditional banking system for personal reasons.  In this sense, microlending can reach a constituency that mainstream banks and even community development or community banking systems can't serve.  The loans Accion and the Bentley students make hover around $5k-$6k, a small enough amount that larger lenders may find it too costly to adminster.

When I lived and worked in Tanzania, I was routinely struck by the entrepreneurial pursuits of colleages and local residents; I came to see entrepreneurship as an ethos versus the narrow pursuit of business creation.  Based on my experience, I find business development to be a very difficult policy "intervention."  There's tangible things we can do, like making capital affordable and accessible to everyone, helping people build good credit, zoning for small businesses or light industry, and facilitating networking, mentoring and marketing.  But businesses are ultimately dependent on a market, and if there isn't one, we can't force a business or the economic development we fervently hope results from it.

Businesses are expensive to launch and notoriously unsteady, especially in the first few years.  Profits go back into the business or into the entrepreneur's (and investors') pockets.  Workers, if there are any, often family members, typically receive low-wages, no benefits, and work long hours.  Not exactly an equitable model.  Given such a business climate, small businesses routinely fight back against regulation, as we're seeing with the federal push to mandate a week of paid sick leave.  This is rarely an audience collectively interested in anti-poverty advocates' broader agendas of community development, public assistance, worker rights, etc.

I urge the students to think about their broader goals with pursuing microfinance.  I think it's an important anti-poverty strategy, albeit one narrowly focused on individual or household development.  In measuring impacts, are we just looking at business survival, loans repaid, or actual economic returns to the owners?  Accion lends on average $6k and entrepreneurs see an average economic gain of $4,500.  Will that satisfy students with dreams of alleviating poverty nationwide?

Image from Linda Joy's Aspire magazine, Bentley students' first microloan recipient.