Mrs. Dawn Arnall
"Microfinance in the U.S."
Remarks delivered by Mrs. Dawn Arnall, Spouse of the U.S. Ambassador to the Kingdom of the Netherlands , November 22, 2006, Hogeschool INHOLLAND, Haarlem
No discussion of microfinance can begin without congratulating the recent awarding of one of this year’s Four Freedom awards to Muhammad Yunus. Since 1982 these bi-lateral awards celebrating the Four Freedoms – freedom of speech and expression, freedom of worship, freedom from want, and freedom from fear - have been organized in cooperation with the Roosevelt Foundation in Zeeland. Professor Yunus was given this prestigious award in celebration of his work championing the Freedom from want.
We also congratulate Professor Yunus and the Grameen Bank on receiving this years’ Nobel Peace Prize for their work on microcredit in Bangladesh. As the Nobel Committee Chairman stated, “Sustainable peace cannot be given unless large numbers of people have the opportunity to get out of poverty. Development such as this is useful in human rights and democracy.”
The United States strongly supports the recognition of Professor Yunus for his work and has been engaged in similar projects throughout the developing world. The United States government’s primary aid agency, the Agency for International Development, commonly known as USAID, is the leading donor for microenterprise development. This aid reaches more than 3.85 million entrepreneurs and households worldwide through USAID’s support of NGOs, credit union networks, and financial institutions.
We, Americans and Dutch, know from our experience in developing countries that microfinance is successful: it empowers the poor by creating higher incomes and more jobs, promotes macroeconomic growth and stabilization, and encourages economic and social inclusion. We also recognize that our societies face similar challenges of poverty and egalitarian economic opportunity. How, then, can we use microfinance in developed market economies to help eradicate poverty in our own countries?
This is a noble and difficult question. Many of the sharpest economic minds, some of whom are sitting beside me and in the audience, are applying their expertise and experience to devising creative solutions. Unfortunately I can not provide you with a bold new application of microfinance in developed western economies; I can however share with you the U.S. experience with microfinance.
To understand the current microfinance paradigm in the U.S. today, one needs to first recognize how the market economy influences the development and application of microfinance programs. While both the Grameen Bank and the U.S. share the goal of alleviating poverty, each must meet that challenge under fundamentally different economic conditions.
For microfinance programs in the U.S. that means competing in a financial market dominated by healthy commercial credit. Banks and other lending institutions in the United States have been slow to develop microfinance programs because they have lower profit margins, face strong competition, and carry greater risk than mainstream lending practices.
The very nature of microfinance – small financial transactions, such as weekly collection, - requires more labor, resulting in higher costs per loan for the financial institution. For-profit financial institutions are not able to recoup these transaction costs through the higher interest rates often charged in developing countries due to American regulations.
Profitability is crucial to the future growth of American microfinance as it must compete with more established financial services such as credit cards and check-cashing that target those with lower wage earnings.
Risk is another challenge facing lenders in the U.S.: higher percentages of default and fraud compound the higher costs associated with microfinance transactions. Grameen Bank’s phenomenally low default rate of 2% is encouraged, in part, by tightly knit communities; repayment is a social as well as a financial obligation. In smaller, less mobile communities, where individuals are more familiar and rooted, risk can be assessed based on past behavior and not necessarily present collateral. Fraud is also much more difficult under these social circumstances.
In addition to a commercial lending infrastructure, the U.S. presents other systemic market challenges to the application and growth of microfinance tools. Business licensing requirements and market saturation prevent many of the poor from successfully launching personal service businesses such as childcare, food preparation, or hair care.
These challenges are firmly embedded in the American economy. So too, is the “American Dream.” The pull of the American Dream is strong and in response, many microfinance providers label their services as microenterprise and target “microentrepeneurs.” Sadly, poor credit, insufficient collateral, and a lack of business education can discourage the poor and minorities from fully engaging in the American economy. Microfinance principles provide a framework for greater economic inclusion of the economically and socially marginalized.
To help ensure egalitarian access to needed financial services, the U.S. government funds successful microfinance initiatives. For example, the U.S. Small Business Administration (SBA), an independent Agency of the Executive Branch of the U.S. Federal Government, provides a Microloan Program to startup, newly established, or growing small businesses. Under the program, SBA makes funds available to non-profit community-based lenders (intermediaries), which then make loans to eligible borrowers in amounts up to a maximum of $35,000. The average loan size is about $13,000.
The Community Development Financial Institutions Fund (CDFI Fund) of the U.S. Treasury works to expand the capacity of financial institutions to provide affordable financing to underserved populations and communities in the U.S. Since its establishment in 1994, it has granted $771 million in awards to community development organizations and financial institutions.
Unfortunately government programs are not large enough to provide funding for all who request it. In that vacuum, not-for-profit and private lenders have organically proliferated and diversified their services, including savings, technical assistance, and business training. Today, there are some 650 organizations that define themselves as involved in microenterprise development or microfinancing. Definitions vary, but in the U.S. these terms most commonly refer to services for a business with 5 or fewer employees requiring less than $35,000 in start-up capital.
ACCION USA, one of the largest non-governmental microlenders in the United States, is an example of a successful non-profit lender in the U.S. They have helped people like Ron Baker: Mr. Baker suffered a major injury that lost him his home renovation job. He was virtually bankrupt. He knew that he wanted to pursue a new career in home inspections, but lacked the funds he needed to get started in business. ACCION USA gave Mr. Baker the $500 loan that launched his career as a home inspector—and entrepreneur. Today Mr. Baker has built a sustainable business as a home inspector, and now educates homebuyers and future inspectors.
During the 14 years of its work in the U.S., ACCION USA has loaned out approximately $148 million to over 15,000 microentrepeneurs like Mr. Baker, with an average loan of $5,300.
Private, for-profit lenders have also stepped in to provide microfinancing services. With technology now connecting lenders and borrowers, websites such as CircleLending and Prosper.com have created a market for themselves by connecting private individual lenders with borrowers. Although these are frequently classified as personal loans, they are a creative response to the need to finance new ideas.
Anecdotal experience from both commercial and non-profit microentrepeneurial programs is consistent with a study by ACCION showing that microenterprise clients improve their average monthly profits by 47%, their business equity by 42% and their take-home income by 38% over an average of 17 months. Such financial gain is impressive. Yet, it may be secondary to increases in self-esteem and social integration.
Assimilation into the larger economy through small business ownership is an important pillar for overall social cohesion. It combats feelings of alienation and strengthens feelings of social belonging. Women especially report an increased feeling of independence from receiving a business loan from a microlender and running their own business. This feeling of economic empowerment frequently spills into other areas of civic participation, including the deepening of community networks and increased political integration.
Despite well developed financial sectors in both countries, some groups – mostly recent immigrants and minorities – still do not have access to the capital they need to launch or enhance their small business and more fully integrate into mainstream markets. These individuals do not want charity, they want opportunities. Through targeted loans to the poor, microfinance promises to create new livelihoods and enhanced capacity for self-improvement.
The commitment of the Netherlands to use microfinance as a tool for development is evident: Princess Maxima’s efforts have done much to create awareness of its importance, while the Dutch government, led by Trade Minister van Gennip, has launched a new advisory council and expertise center on microfinance.
Regardless of how developed a country’s economy is, microfinance tools can often make the difference needed to move marginalized individuals and families out of poverty and into the mainstream. It is my hope that we, the United States and the Netherlands, in conjunction with our partners throughout Europe, can continue to deepen our partnership by sharing our experiences and best practices in this emerging financial field.
Thank you.