By Rebecca Busse
Microfinance in the US is an entirely different species than its international cousin. Microfinance was popularized by Mohammad Yunus, who won the 2006 Nobel Peace Prize for his work with the Grameen Bank as “Banker to the Poor” in Bangladesh. His work started a revolution in poverty alleviation, with the aim of encouraging dignity through self-sufficiency for the clients. The basic premise is that banks lend low-income would-be entrepreneurs loans that range anywhere from $50-$2000, and even this small influx of capital can be vital to small businesses abroad. Interest rates are often higher abroad than in the US because of higher administrative costs. Because borrowers often do not have collateral to secure loans, their reputation is used to ensure that they repay. And repay they do: international microfinance loans have some of the highest loan repayment rates, and often this small helping hand is enough to raise entire generations out of absolute poverty.
Several key differences in international microfinance spring from dissimilar business and cultural environments: domestic microfinance is highly regulated; there is more socioeconomic diversity among borrowers which leads to bigger outreach expenses, and the scale is entirely different. Last year, India saw 3 million microloans, whereas Opportunity Fund, one of the larger domestic microfinance institutions, has made only 900 loans over ten years. In the US, most of the administrative costs are subsidized by donations, and licensing and permit regulations make it a more bureaucratic process. Marketing also plays a part – most budding entrepreneurs in the US don’t think of microfinance as a tool that they can access, but as more people find themselves being turned down by major banks for funding, microfinance is filling that gap in financial services. Like microfinance abroad, its domestic cousin serves primarily women, primarily minorities, and is increasingly being perceived as a “hand up” rather than a “handout.”
Domestic microfinance is coming into its own, as evidenced by the first annual Microfinance California Conference. As it becomes more popular, the models for providing financial services differ greatly. The San Francisco-based organization Kiva provides a web-based financial model in which lender/donors choose an entrepreneur to lend to based on a Facebook-like profile and personal story. Lender/donors get to have a personal connection with those they lend to. As Kiva stated at the conference, they are basically selling “good stories.”
CEO Women has an entirely different model. Theirs is a training-led model (as opposed to a financial services-based model) in which immigrants watch soap operas crafted specifically to provide ESL training and impart business skills. CEO Women will unveil their Grand Cafe approach, a three-step model, in September 2009. Step one involves outreach and assessment, where potential clients watch the first six episodes of a telenovela (soap opera). If clients progress to the next level, they pick up necessary English skills as well as basic business skills, all cloaked in dramatic entertainment. The last step involves access to funds, technological assistance and business coaching. CEO Women aims to be at the intersection of entrepreneurship, ESL training and media as a multi-pronged approach to providing services. The challenge of outreach and marketing to the Latino/a immigrant population prompted CEO Women to invent a more “sexy” way to attract potential clients by using the familiar cultural icon, the telenovela.
All this talk of financial sustainability, but what about environmental sustainability? The only organization at Microfinance California to directly present on this topic was Urban Solutions. Urban Solutions’ innovative mission: to revitalize part of San Francisco (SoMa) by engaging low-income entrepreneurs in sustainability practices such as energy efficiency. 300 businesses a year are served in this model, with green business consultants providing pro bono consulting, site visits, project management, and even green business workshops. The organization’s reach is mainly local to the San Francisco Bay Area, but Urban Solutions’ website is increasingly being used by entrepreneurs in other parts of the country.
While I was excited to find a local organization working at the intersection of poverty alleviation and environmental sustainability, it begged the question: how scalable is this model? One of the reasons Kiva grew at such an exponential pace for an organization is that it is an easily scalable model – their primary limitation is finding enough recipients for their loans! When I asked Jenny McNulty, the Executive Director of Urban Solutions about the ability of their model to easily scale up, her answer was that they are “working on it.” With 30-50 hours spent with each client, the efficiency with which clients are served needs to be improved on if the program is to be effective in other cities. Urban Solutions’ activities are also dependent on donations and grants, which is not the most financially sustainable position to be in during an economic downturn. However, it is highly encouraging to find an organization in our own backyard that is concerned with both environmental, as well as financial sustainability.