As the Gateway explores the world in search of interesting and relevant microfinance news, we hear more and more about microfinance in the United States (US). For instance: two recent conferences were held on US microfinance – Microfinance USA and the Underbanked Financial Services Forum; Kiva announced their Kiva City initiative to expand microfinance in the US; CNN featured the 10 top microfinance companies in the US and The Economist published several articles on the topic in 2011. All of this attention made us think that the topic deserved a second look.
Below are five interesting things we learned about microfinance in the US:
Microfinance in the US is not new (though use of the term “microfinance” is relatively new).
In fact, non-bank lending to small businesses dates back to the 1970s (and beyond on a more informal basis), around the same time that Professor Yunus began making loans in Bangladesh. The Community Reinvestment Act (1977), requiring banks to invest in the communities where they do business, helped spur the growth of community development finance institutions (CDFIs).
962 certified CDFIs currently operate in the US, though only a sub-set of these offer loans to microenterprises. A report by FIELD, an initiative of the Aspen Institute, estimated that 362 microlenders made 9,191 loans in FY2008, totaling $100,912,050 (average loan size about $11,000).
In addition to CDFIs, a growing number of alternative financial service (AFS) providers are trying to tap into the profit potential of the low-income market. Payday lenders and pawn shops have long existed, but they face increasing competition from new entrants, such as pre-paid debit cards and big-box retailers (like Wal-Mart). Experts hope increasing competition will spur innovation and drive prices down. A recent CGAP post further explores the state of innovative business models and technologies in the U.S. domestic financial inclusion world.
Demand for microfinance in the US is strong.
Despite being a wealthy country, poverty in the US is on the rise. In 2010, the number of people living in poverty rose to 46.2 million. This was the fourth increase in a row and the largest number in all the years since the government began making poverty estimates in 1958.
Another surprising statistic is that 25.6% of US households are unbanked (no relationship with a bank) or underbanked (have a bank account but prefer to use AFS providers). Figures vary dramatically by race and ethnicity: 53.3% of Black households are underbanked or unbanked while that figure is just 18.2% for white households. Female headed households account for 20% of the unbanked.
According to the Association for Enterprise Opportunity, 88% of businesses (25.5 million) in the US are microbusinesses (defined as 0-4 employees) and 70% of businesses have revenues of less than $100,000. Women-owned businesses and businesses owned by Black or Hispanic individuals are more likely to have revenues less than $100,000.
Reasons for being unbanked in the US are similar to the rest of the world.
As with microfinance clients in other parts of the world, commonly cited reasons for being unbanked are insufficient funds to open an account, banks feel unwelcoming or they do not trust banks, lack of documentation, and a poor credit history or no history.
First, group loans are not typically used in the US. Borrowers are often geographically disbursed so the social collateral of the group methodology is not as likely to guarantee repayment. Second, loans in the US are much larger than those internationally, starting around $1,500 and going up to $50,000. Banks do not typically make business loans less than $50,000 so microfinance providers aim to meet this demand. Third, CDFIs typically combine business loans with other support services such as financial education and business coaching while most MFIs focus exclusively on financial services. For more on the comparison between the US and other markets, take a look at Opportunity Fund’s write-up.
Several organizations working internationally also have microfinance programs in the US.
Finally, we are interested in hearing from you…what do you think the US market could learn from experiences elsewhere, and vice versa? What other resources would you suggest for someone looking to learn more about the topic?
Want to learn more? Here are suggested resources. Also, view more resources in the Gateway's organization database and library.
Measuring Performance and Outcomes is Critical for the Industry
Great article. The US field is indeed getting recognition after 20 years of doing this work. It's important for programs and donors to understand the ROI for investments into micro. FIELD developed a new website that does just that: www.microtracker.org. The site aims to provide data on the US industry, help programs improve their performance, and raise awareness. Check it out.
United States
02 Nov 2011
Further information
For more info on our microsavings program, see here: http://www.opportunityfund.org/about/our-programs/ida. The other large microsavings program (though they only do savings) is EARN. The national organization pushing the savings and asset-building agenda and research is CFED. And the lead academic is Michael Sherraden at St. Louis.
ihyfudc uiyut Austria
07 Oct 2011
Microfinance in the UK
An Economist article highlights the microfinance industry in the UK, where 5% of the population is unbanked and 15% underbanked.
Just after we posted this article, Bank of America (the largest American bank ranked by assets) announced that they would begin charging a fee of $5 per month for use of a debit card. Those defending the fee say that it was previously hidden and it's better for customers to know that they are paying for use of a debit card. Others say it will hurt low-income Americans by providing further disincentive to keep their money in a bank account.
What about the other side of the coin: microsavings! Microcredit always gets headline attention, but microsavings is as robust a field in the U.S. as credit. Typically, microcredit and microsavings are discussed separately (as the article noted). In fact, Opportunity Fund is unique in that we are the largest microlender in California (and #3 in the nation) and we also operate the nation's largest IDA microsavings program. For more info on our microsavings program, see here: http://www.opportunityfund.org/about/our-programs/ida
The other large microsavings program (though they only do savings) is EARN. The national organization pushing the savings and asset-building agenda and research is CFED. And the lead academic is Michael Sherraden at St. Louis.
I only mention this because when we really get down to it, our savings might be making a larger impact on reducing poverty than the credit at this point. (JPAL / FAI Randomistas have found the same conclusion in their work abroad, too.)
Caitlin McShane Opportunity Fund United States
29 Sep 2011
Domestic Microfinance Needs Credit Too
I started following Microfinance Gateway while working in El Salvador with FINCA, a large, international MFI. However, I found that the majority of my clients lived off (either partially or completely) remittances that were sent to them by their relatives living in the U.S. These same people are those who own small businesses here in the States and are facing the same banking issues that their relatives in developing countries face. That's why I now work for Project Enterprise, a CDFI in New York that has been operating a group lending model since 1997. We don't require a credit check, collateral or prior business experience. In addition to loans, we offer a host of other services to support our members, including training, access to markets, networking opportunities and probono lawyer services. It is great that the Gateway is finally highlighting domestic microfinance, but I think more research and coverage needs to be given to organizations like Project Enterprise that are doing innovative work to empower entrepreneurs.
Despite being a wealthy country, 
