There has already been some discussion about Kiva in the Th!nk universe on how philanthropists can support microlending to developing world entrepreneurs. And, although we could talk about Kiva’s recent troubles concerning disclosure of their lending procedures, I’m going to take microfinance in a non-traditional direction instead—to the United States.
NPR recently profiled Ryan Fochler, a small business owner near the Washington, D.C. area. In the floundering economic climate, Fochler’s credit hopes were dashed by conventional banks, and he sought help elsewhere with the Latino Economic Development Corporation (LEDC). The LEDC offers small loans and business development support to graduate their clients into traditional financial institutions. These types of microloans definitely differ in size from those on Kiva—the average is around $10,000 but they can range anywhere from $500 to $50,000. As a consequence, small business owners perceived as riskier clients still receive the opportunity to succeed.
The story caught my attention, but microfinance institutions have long been in the US, even though we don’t typically think to look for them there. Grameen America, an extension of Muhammad Yunus’ Grameen Foundation, is now targeting populations of unbanked Americans to give them the credit to expand their businesses. After some disappointments with microloan repayments in Arkansas in the 1980s, the emphasis is not just on capital but on empowering business owners with skill development. Organizations like ACCION USA do the same but without Grameen’s trademark group-lending model. A number of US organizations focus primarily on skill-building without lending money at all.
Microlending is definitely not without its problems—high interest rates, ambiguously reported default rates, and clients who end up saddled with debts after using loans for consumption rather than income generation. The jury is still out on how microlending can be an effective, long-term solution to poverty, finding thus far that most success depends on context. (David Roodman has a fantastic open book blog if you’re interested in learning more.)
But the broader lesson from all this is that development is not a one way street. Providing credit access and teaching responsible business practices to those marginalized by the traditional banking regime can be great methods for empowering business owners, no matter the country.
Great post Maria. I was thinking today about how we have to learn, we’re a long way from perfect ourselves!
Maria, interesting post. At the end of the day, what lenders have in mind are their businesses…Hopefully, things will improve…especially in my country, the Philippines.
Awe-inspiring. You are right, Maria. It is definitely not a one way street. I hope for the same to happen in Brazil, Iris. But for now, they are only dragging its heels over this issue here.
@Lara: Thanks. I definitely think so. We always have to be thinking about how we can make ourselves better and more accountable.
@Iris: Yes, they definitely have their own businesses in mind. It’s interesting how risk is perceived in different situations, especially how things change when business trainings are offered. Is microlending widely used in the Philippines?
@Luan: It did surprise me. I think it’s an important example of recognizing the ways we can improve and learn. Improving credit access is such a tricky thing to accomplish, even in the US. Since there are many populations left out of the market, it’s good to see some solutions.
hi Maria! Microlending is not widely used in the Philippines. I mean not the formal or regulated kind that is why people rely on what we call 5-6 which are basically loan sharks that charge very high interest rates wherein you have to pay P600 pesos for every P500 that you borrow. (exchange rate $1 dollar equals P44 pesos).
Microlending is one of the best ideas ever invented in the field of development, and one of few that is universal, able to work everywhere - South and North - as Maria’s post shows. No doubt Mr. Yunus deserved his Nobel. I want to quote what he said to me once in an interview: “When we talk about development we think of dams and airports. To me development means change at the bottom. One day I met a women who could not leave her house because she was washing her only sari. Buying one more piece of cloth would open a world for her, returned dignity”.
@Robert You said nicely about change in the bottom. Agree.
Great post. I’ve been following the Kiva controversy with interest. It raises lots of interest points about the attachment of donors to the projects they are supporting. Must write a blog on this myself
@Iris: Wow, those are high rates! That’s really interesting. I would have thought that in the face of a credit situation like that, microlending would be more prevalent. Thanks for bringing that up.
@Robert: Perfect quote. I really like it. Microlending is definitely a great tool anywhere there are people without access to credit. It’s very versatile although I think we have to be careful in saying that it’s universal since a lot of studies have been showing that success greatly depends on the context of the lending environment. But, as you mention, making sure there is enough work done from the bottom up is really crucial.
@Clare: Looking forward to it! The Kiva situation was really interesting, particularly how they responded and recovered.
yes Maria! interesting…audacious and cruel
Great article. Micro lending can indeed empower small businesses, but it can also bury those businesses in debt. Do you think micro finance can help economies recover faster from this recession? By the way, we provide working capital loans.