Saturday, November 04, 2006

Can Microfinance Work in America?

Muhammad Yunus and the Grameen Bank of Bangladesh were jointly given the Nobel Peace Prize this year. The focus of Yunus and his bank is microfinance - small loans given to the poor, most commonly women. The success of microfinance has been acclaimed by many, indeed, the payback rate has been surprisingly high and the fact that it helps the poor is undisputed. Many have insinuated that microfinance can solve the plague of poverty entirely - that is going too far, but microfinance is certainly a useful tool in alleviating the effects of poverty.

That said, microfinance is primarily thought of as a developing country-centric tool. There are indeed microfinance organizations in the United States - 246 in 2003, most of which were nonprofit. Yet the concept has not taken hold, especially not in impoverished areas. Commercial banks are, for obvious reasons, reticent to enter the realm of microfinance, and indeed, there is not much incentive for them to do so. But the Grameen Bank is an example for all to see that microfinance can be conducted by companies and organizations that are not nonprofit.

So, the question that begs to be asked, if microfinance is a feasible option in the United States for profit-seeking organizations, is clear: can it work? The question must be examined in the respect of alleviating poverty, and not in garnering profit. Although it may be irresponsible to disregard the profit motive in a dog-eat-dog economic environment such as the United States, the primary purpose of microfinance is to alleviate poverty and must be examined as such. So again, can it work?

Gary Becker, 1992 Nobel Laureate, writes, "Economic growth requires secure property rights, encouragement of private enterprise, openness to international trade, stimulation of education, limited and sensible regulations, and reasonably honest government. Microfinance makes only a small direct contribution to any of these variables." Becker is correct, but is commenting on the effectiveness of microfinance in developing countries. In the United States, where all the institutions and requirements for economic growth that Becker mentions are present, microfinance certainly can help alleviate poverty.

Some may point to the Small Business Administration, a governmental agency which aids small businesses, as an adequate substitute for microfinance in the United States. Yet, as it is a government organization, it is a terribly inefficient instrument for poverty reduction, and indeed a private sector replacement -commercial microfinance- would be far more effective. Microfinance in the United States is, however, vastly different from that in developing countries. In the latter microfinance is given to encourage primarily women to start low-technology enterprises, such as fruit stands. In the United States such ventures would be fruitless – there is simply not enough demand for fruit stands for it to be an economically viable solution for a poor family. Instead, microfinance needs to be conducted on a larger scale in order to fully ameliorate the would-be business starter. But the risk for a $5,000 loan is significantly higher than that for a $500 loan, and as such it is understandable why commercial microfinance would be seen as unviable in the United States.

Nevertheless, budding entrepreneurs throughout the United States, including those with hardly a penny to their name, abound, and available capital to them would surely in some instances reap rewards. The Small Business Administration itself, in the loans it has made, has, despite defaults, been able to actually make money for the government. How? Increased tax revenues from companies that it has helped. Quite simply, the fact that a governmental organization has been able to make money is a huge indication that the private sector can and should make itself involved in similar ventures.

The lack of a significant commercial microfinance presence in the United States, where demand would certainly be high, is troubling. It can only be hoped that the spreading popularity of microfinance will take hold in the United States, where its benefits will certainly be clear for all to see in the reduction of poverty.