Microcredit Part 2
Application of Microcredit in the United States
In my last segment, I introduced the concept of microcredit and explained it’s basic foundations. As I explained before, micro-credit is one such way in which stimulating development from below in the societal totem pole also serves to advance democracy and human rights. Now I will put the system into perspective and confront the issues and problems of applying such a system to the United States. The United States in any given year has 10% to 17% living below the poverty threshold as determined by the US Census.  This number translates to about 30-40 million individuals. Furthermore, most Americans (58.5%) will spend at least one year below the poverty line at some point between ages 25 and 75. These statistics seem to suggest that a microcredit system established in the United States would be very successful. However this is not the case. Despite the success of microcredit in other countries such as India, the adoption of this system of lending has not caught on as much in the United States.
One of the earliest attempts at applying the concept of microcredit to the United States was when in 1985, Bill Clinton was governor of Arkansas and heard of Muhammed Yunus’s work in India. However, the program, called the Good Faith fund, failed, because “the group lending model never caught on.” Since then, dozens of similar attempts have been made, and while many have been successful, the scale pales in comparison to that of Bangladesh and other developing countries.
Currently the poor in the United States often turn to fringe financial groups, such as payday lenders or loan sharks who can charge interest rates of up to 400 percent annually. The Consumer Federation said the volume of payday loans has almost doubled to $48 billion in the past five years. Traditional banks generally do not provide financial services or loans to individuals with little or no cash income or other forms of collateral. Grameen America charges 15 percent interest but on a declining balance basis, which means that the effective rate is closer to 7.3 percent towards the end of the loan’s term. However to qualify for such a loan, under the microcredit system, borrowers must get together in groups of five people and if one person misses a weekly repayment or defaults, the whole group advances more slowly.
Failure in current applications
So far, the results have been mixed when it comes to applying microcredit to present day society in America. The microcredit programs presently in place have generally not been self-sustaining, and they have been much less successful in preventing defaults on loans. In part, this is a result of how the programs have been targeting populations (some focus more on new entrepreneurs or the unemployed, instead of individuals running small, but undercapitalized, enterprises). However, it is also in part because some of the tools used in developing countries where microcredit methods were first devised are not appropriate in all U.S. contexts.
Many programs have suffered because of difficulty in understanding who they are trying to help. Many lenders also have had difficulty using the tools developed originally for microcredit in poorer countries to manage the riskiness of their loans in the United States. In particular, these programs had problems when integrating peer groups into lending in lieu of tangible collateral.
Many programs have also had difficulty crafting appropriate technical and training materials. In some cases, programs require training that is inappropriate for some borrowers. This is particularly the case for established businesses who need working capital to quickly take up an opportunity or deal with an immediate crisis.
How to fix the problem
The most important element for success in a microcredit program is to have a clear understanding of who the target population is that you're trying to help, and what their specific needs are. Given a close and detailed knowledge of the target population, the lender can begin tailoring loans to the specific needs of different borrowers. For example, ACCION offers a stepped loan package that increases loan sizes based on demonstrated payback records and increasing capacity to absorb debt. After a self-evaluation, ACCION also began offering moderately larger loans to single borrowers (that is, borrowers not part of a peer group) who were already engaged in growing micro-enterprises, but who still have trouble accessing traditional credit.  Often times, borrowers need a place in which they can save their money in addition to getting loans. If a potential microcredit organization wants to succeed in the United States, they have to realize that building a relationship through microcredit can allow lenders to establish a deeper level of connection with their customers. This would allow organizations to provide advice and assistance to the borrower in savings which would further secure their financial situation. Lenders can also benefit from focusing more narrowly on these credit and savings services, and offering training and technical expertise through partners who specialize in those programs. Because these are different activities, both groups may be more successful if they can focus on one aspect, and work together to bring improvements to their respective services to their clients.
As long as microcredit organizations in the United States can focus on the needs of the public who require their services, the problems that other countries have faced will not be repeated. The organizations must realize that they are not just another banking or lending organization. If they think this way, then their actions will be no different from traditional banks or loan sharks. Only when a deeper and more personal connection is established by these lending organizations can they succeed in a country where people are not used to good will in monetary lending situations such as the United States.
Hacker, J, “The great risk shift: The new insecurity and the decline of the American dream,” Oxford University Press (2006).
Posner, Andy, A Solution to the Limited Success of Micro-Credit in the United States?, (2009) available at http://www.andyposner.org/index.php/posner/blog_main_comments.
Supra at note 6.
Gregory Claxton, Microcredit Strategies for Assisting Neighborhood Businesses, 2005 available at http://www.umich.edu/~econdev/microcredit/
Nitin Bhatt and Shui-Yan Tang, "Making Microcredit Work in the United States: Social, Financial, and Administrative Dimensions," Economic Development Quarterly, vol. 15, no. 3 (2001).