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Microfinance

Microfinance – A quick look at the U.S. market

Many people talk about Microfinance in terms of just loans to small entrepreneurs. In fact, it is much more inclusive than that. First it combines both consumer and small business elements which many times overlap. In the United States this market represents a significant part of the population. It includes any kind of financial service provided to low-income individuals or to those who do not have access to typical banking services. The FDIC did a study that showed it to be between 7.5 to 20% of the population.1 In the developing economies around the world this percentage is much higher. In India, South Asia, and Africa it constitutes a bulk of financial transactions in terms of sheer numbers and the world bank estimates they represent 40-60% of the population.2 These numbers include not only loans but other financial services such as bill payment and savings as well.

In order to successfully provide credit to unbanked consumers, micro lenders who specialize in this type of business, as with any lender, need to be able to correctly assess the risk. These companies have developed procedures to deal with the unique problems of evaluating requests for credit. While the average loan amount is much smaller than you may be used to, you can sympathize with the issues they face when there is no credit score, no verifiable income or financial statements of any kind to help guide your decision. Well, there is always a way. One lender that works with street vendors gets their receipt for chickens they purchase. Once you have that you can calculate how many chicken tacos they sell and from that their gross income. You can also estimate other costs and get to a reasonable net income.

You can see that this type of evaluation relies on the special knowledge that micro lenders have of the loan applicant pool. In addition, some micro lenders have developed score models based on their experience to help refine the process.

Is this market worth the effort? Is this an area that you could look to for expansion? Well you will not be first, take a look at Elmira Bayrasli ‘s piece for Forbes on Microfinance in America.3 There are other examples as financial institutions either search for other markets or wish to provide assistance to small entrepreneurs.

Clearly there is a need; the question is – is there a market? The two are not the same. A market implies that there is potential profitable business out there. With the combination of higher risk, higher interest rates, and the negative image of the current operators it may be a bridge too far.


1FDIC: 2011 FDIC National Survey of Unbanked and Underbanked Households. Fdic.gov. 2012-12-26
2World Bank – The Global Findex Database 2014 Measuring Financial Inclusion around the World
3Microfinance in America? – Forbes

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