Issue: US vs. Third World Countries

Today, I will be addressing another topic that I feel is very important in the field of microfinance. I have been saying that microfinance has been found as an effective way of helping the poor find a way out of poverty. But I have always been a bit wary of its effectiveness in the United States. The United States is definitely a different market than microfinance capitals like Bangladesh, India, and Mexico. These countries are certainly not as developed and have much more room for micro-entrepenuers to grow. There are many problems facing microfinance and microcredit in the United States but the Grameen Bank and President Obama think otherwise. I will be discussing the opposing views and what I think of them in this post.

I personally believe that microfinance, especially microcredit, is difficult to make successful in the United States. It is not as easy to start a business selling small hand made crafts in the United States than in Bangladesh or India. It is much harder to get money together to start a business in the United States than in Third World Countries. In a paper written by Mark Schreiner and Johnathan Morduch, they address the problems of replicating the kinds of success seen in microfinance in developing countries and economies and the differences that may pose difficulties for the United States microfinance market (Link to paper). They named seven reasons why microfinance will have problems reaching the success of other countries' success. The first is the size of the microfinance sector. It is true that we have our own share of poverty in the country but the microenterprise sector is much smaller in the US than in Third World countries. Therefore, the size of the microfinance market is not as large. Many unemployed will look towards hourly wage jobs than starting their own business because it is less risky. In Third World countries, according to this report, most unemployed looks towards opening their own small businesses no matter how small they may be. The United States also has a functional welfare system that most of these Third World countries do not. This safety net allows people to live off welfare which makes microenterprises even less attractive. Moreover, large firms and enterprises are the main types of businesses in the United States. In many of the Third World countries, small vendors and shops are the main form of retail services. Although small businesses are not completely nonexistent in the US there are only a small number of these specialized services in America. Furthermore, the lack of social capital between people in the US compromises one of the strategies of microfinance, group liability. People in the US are more likely to look for individual success and will not throw their hat in with their neighbors. There is much less connection between neighbors on a block in a major US city than there is between fellow villagers in India. I agree that these problems are serious when thinking about expanding the microfinance activity in the states. It is most likely why no MFI in the United States can turn a profit.

But there are two points that the authors made that I do not agree with. One of the points is that many people in the United States have many options when it comes to banking services including the poor. But I cannot believe that to be true. Commercial banks are not in competition with MFIs. The main clients to MFIs are people that the commercial banks have shunned away because they do not have any collateral or any consistent use of their services. The second point that I do not agree with is the idea that MFIs in the United States do not use a self-chosen peer liability group. It may have been true when the article was written a few years ago but after the entrance of Grameen Bank America that has all changed. Grameen Bank America has brought all of their services from Bangladesh to New York City to try to help women who want to change their lives. They use the same concept of peer liability groups to ensure that people can repay their loans. In fact, Grameen Bank has announced recently that it will be expanding their loans in the United States. They have been able to get a 99.5% repayment rate. Last year they made over $1million of loans to over 400 women in New York City. Furthermore, each of the borrowers also opened up savings accounts with Grameen Bank. Grameen Bank believes that the trust people have in their neighbors and friends lives in New York just as it lives in the villagers in Bangladesh. They hope to be able to expand and give out an even larger amount of loans in 2009. This just shows that people are finding successful ways to bring microfinance into the forefront in American finance. It is especially important during these tough economic times. I have also mentioned in the past the belief Barack Obama has in microfinance. He also believes that it will help the United States bring more people out of poverty. He supports the efforts of MFIs abroad and in the States.

It is a tough call overall whether microfinance will really flourish in the United States as it did in South America or Southern Asia. It is obvious that the regulations that hold togethe businesses in the United States are not as friendly to microentrepenuers as the Third World countries. But I do believe that microfinance is a great idea and great ideas will be able to find a way to change lives anywhere it goes. I think microfinance can be adapted for the American culture and find a way to help people out of poverty.