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Micro-Lending Model Finding New Traction in First-World Economies

When we think of microfinance, we usually consider it a poverty alleviation tool for developing countries. Yet, micro-lending also offers many benefits to wealthier countries.

Over the last few years, an increasing number of companies have started offering micro-lending services to Americans who do not have the traditional collateral to secure a loan from a bank. But is there enough demand for microfinance in the U.S. for the model to be viable? Can it be useful in a society in which one’s credit score is usually evaluated squarely on numbers?

Consider these numbers instead: one in four households in the U.S. have limited or no access to banking services. As the U.S. comes out of the financial crisis, the need for micro-lending services is much greater than it may seem. The housing crisis damaged credit scores for many Americans, preventing them from getting a loan for the following seven years.

At the same time, banks became wearier of issuing business loans for small businesses. The House Small Business Committee named access to capital “the root problem” for small business growth, stating that only 19 percent of businesses with less than $500,000 in annual revenue that sought a business bank loan were approved. Every day, banks reject 8,000 small business loan applications

Yet, microfinance organizations that work in the U.S. offer entrepreneurs an alternative to formal banking. Micro-lending products and terms range greatly and often are tailored to specific audiences—for example, minorities, particular industries or locations.

Grameen America opened its first branch in New York in 2008 and is a textbook example of a micro-lending model. It replicates Mohammed Yunus’s Grameen Bank providing group loans to impoverished women so they can start or expand their businesses. Upon completion of basic financial literacy training, they receive a group loan in which every member of the group is responsible for the other members repaying their shares of the loan and interest. The women have weekly group meetings with the Grameen America staff to pay the loan and continue business mentoring. As an added benefit, the loan repayments get reported to the credit rating agencies, improving the women’s credit score.

However, most companies that provide microloans to American entrepreneurs do not require training or forming a group to receive a loan. Among the newest additions to the micro-lending market is Kiva Zip. Many recognize Kiva as an online crowdsourcing platform that provides microloans to “entrepreneurs across the globe.” Last year, though, Kiva launched its Zip program to provide the same opportunities to American entrepreneurs.

Unlike traditional microfinance, Kiva Zip loans are interest-free—but follow the common principle of microfinance because they still use social collateral to determine a borrower’s credit. According to the Kiva Zip manual, they “believe that an entrepreneur’s character and network of support and relationships are just as valuable as traditional ﬁnancial metrics.” To ensure a borrower’s good character and reputation, Kiva Zip requires the endorsement of a trustee—someone respected within the community—to back the borrower’s credibility.

Jonas Singer, cofounder of the Union Kitchen culinary incubator in Washington, D.C., has been a Kiva Zip Trustee for a year. He shared with me that many of the UK startups have benefited from microloans, but he says there is both demand and wariness when it comes to micro-lending.

“There is demand because credit is hard to come by, capital is absolutely necessary, and financial institutions are, frankly, not delivering on the commitments they say they are making in our communities,” Jonas said. “The wariness is because there is trepidation about money. People don’t understand the loan terms or how they work or what the benefit is to the lender. Confusion and distrust—or, more generally, just ignorance—stand in the way of microfinance. But that will change with time.”

Microfinance is only beginning to enter the American market as a way for small businesses to access capital. Now may be the perfect moment, however, for our financial institutions to apply this model to help American small businesses grow.

Vera Chernova
