Microfinance in America…Is The Paradigm Changing?

By Bryan Stubbs

While not perfect, microfinance and Microfinance Institutions (MFIs) have been shown to be an effective tool in aiding mircoenterprises throughout third world communities. The positive impact they have on alleviating poverty and empowering entrepreneurs have been well publicized (Grameen Bank or BRAC). And while challenges remain (high interest rates/impact of the entrance of the capital markets into the space), many remain bullish on the future of microfinance in third world countries. But what happens when the microfinance model comes to an established economy of the likes of say…the United States?

As the first Microfinance USA 2010 conference closes, this is the very question at the heart of the two-day event. Microloans for businesses are hardly new in the United States. The SBA has been outsourcing microloans to financial institutions for years (based primarily on credit score and usage of its antiquated SBDC program). And the US Dept. of Treasury’s community development financial institution (CDFI) program has provided credit and financial services to under-served markets and populations through intermediaries for decades with mixed results. But microloans and microfinance are two radical different approaches to lending. The former uses a traditional system of lending, based on credit with little attention being given to character or circumstances of the entrepreneur. The later takes a holistic approach to lending, including evaluating the history (why they may or may not have good credit) and character of the borrower. In regards to the CDFI program, while its mission would seem to fit better into the microfinance paradigm, decades of poor oversite, ineffeciences, mission drift and unwillingness by policy desicion makers at the Treasuery and SEC to update the program has led to a program that has not kept up with the changing needs of our economy. For every successful CDFI (Shore), dozens and dozens make one loan or less a year and seem poorly managed, financially wasteful and seem to miss the point.

The conference consensus is that Microfinance in the United States is about a shifting paradigm of how we view innovation and entrepreneurship, treat access to capital (and where capital comes from), raise low-to-moderate incomes, change the financial habits of the poor, and how we engage and empower our communities. Microfinance isn’t afraid to toss out the old systems. It’s open to new ideas, new platforms and technologies, P2P lending, and even putting a face on a banker (the socialization of microfinance). Will the establishment/financial institutuions follow? Will policy makers take a strong look at this tool and embrace it? What about the role of banks and the CRA system? We shall see.

Lots to discuss. Look for in-depth blog entries in the coming weeks as we go into more detail from the conference. But in the meantime, with their eyes wide open (after all, the city of San Francisco, home to many of the new MFIs, has more payday loan stores than Starbucks and McDonalds combined), the feeling here is that microfinance not only belongs in the United States, but could very well be a key tool in building our economy as we eventually come out of the recession.


Bryan Stubbs has spent the last decade working to positively impact our communities through entrepreneurial and consultative initiatives at the Chicago Sustainable Business Alliance (senior advisor) and Chicago Community Ventures (director). Most recently he finished a five-month residency at San Francisco’s Presidio Graduate School, researching the role of early adaptation of sustainable business practices on start-up ventures versus traditional start-ups (with the goal of affecting policy on the federal level). He earned a Master’s of Business Administration with a concentration in Entrepreneurship from the University of Illinois.

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3 responses

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    1. We have set-up a microfinance in Ghana -Takoradi in October 2010.We are looking for funding or to raise growth capital.

  2. Why does it matter that there are more payday loan stores in San Francisco than Starbucks and McDonalds combined? A better comparison would be that nationwide there are almost five times more banks than payday lenders. Banks that charge overdraft and bounced check fees that can be more expensive than payday loans. Does that mean there are too many banks?

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