Thursday, April 29, 2010

The Armchair Microfinancist Moves Home

A few weeks ago, the New York Times brought some disturbing news into the homes of armchair microfinancists across the country. Then, the Washington Post delivered another shock to the traditional microfinance narrative: Microfinance was coming to the United States.

Well, actually, the article reported on Grameen America expanding into the nation's capital on top of its operations in New York and Omaha. Also, Kiva started loaning to US entrepreneurs a few years ago and other person-to-person loaning sites have US options. One focuses exclusively on people form the US. And if you've read Muhammad Yunus' autobiography, Banker to the Poor, he talks about his partnership with Bill and Hillary Clinton back when Bill was governor of Arkansas.

So, this news isn't that shocking. Microfinance has been in the US for a long time. But even though microfinance has been proven to work domestically, there might still be some lingering questions for the armchair microfinancist.

Besides the person-to-person connection, microfinance is appealing because it doesn't  take a lot of resources on the donor side: Big change can be made from small amounts of money. This might not be the case back home, as $25 cannot go nearly as far in DC as it can in San Ramon, Nicaragua. You typically see about a $200-$800 figure for most loans on Kiva (with some exceptions, to be sure), but the US loans are significantly more, some reaching $10,000. And when comparing purchasing power parities for countries, it's clear that  money in the developing world goes a lot further. On top of this, the poverty in the US is not as extreme as those living on less than $2 a day in the developing world.

But chucking out domestic microfinance opportunities based on this reasoning alone ignores the fundamental purpose of microfinance: Giving credit (or savings) to people who don't have access to it. In a country like the US with a bank every few blocks or so, it may seem like there's a plethora of financial options, but people here are still left out of the domestic financial market.

While working with a microfinance institution in Iowa, I was shocked to learn the poverty levels in my immediate surrounding community. Poweshiek County, where the organization is based, has about a ten percent poverty rate and the state of Iowa overall has about a 11 percent poverty rate. Looking deeper into these numbers, myself and others from the MFI talked with community leaders and learned that people in the county suffered from loan sharking and pay day loans, sometimes paying exorbitant interest rates because they didn't have good enough credit to take out a traditional loan. Others were forced to rent their household appliances like a dishwasher or a dryer at high interest rates because they didn't have the money to buy it and couldn't find someone to make a small loan to help them with the purchase.

At the time, the MFI was focused only on making loans abroad and when this local issue was brought up to the membership, there was some hesitancy at first to expand domestically. Many people cited the issues I outlined above, among others, as a reason to stay focused internationally. (I also hesitated to fully commit to a domestic program for the same reasons.) But then when we were approached formally by several community organizations encouraging us to create a domestic loaning program, we decided to do it. We've already made our first few loans to local community members and the project has been met with great enthusiasm.

These issues of poverty are not limited to rural Iowa. In researching for this post, I learned that the US as a whole has a poverty rate of around 13 percent. I found this shocking. About one in ten Americans lives below the poverty line and many more hover around it. This is the reason that Yunus expanded operations into the US so early on and why other organizations like Accion have domestic programs as well. A focus on global poverty is a good strategy for all the armchair microfinancists out there, but I hope they won't forget the domestic poor in their decisions. The US is not excluded from that globe in "global poverty," after all.

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