Microfinance in the U.S. is providing opportunities for entrepreneurs who may not otherwise have it, but the self-sustainability for such a lending model in America is still in question, Federal Reserve Chairman Ben Bernanke said on Tuesday.
Microlending is the practice of offering small loans and other financial services to borrowers who are too poor or not sufficiently creditworthy to receive traditional bank loans. Bernanke spoke at a gathering of one of the largest U.S. microcredit lenders, the Accion Texas summit in San Antonio.
I want to affirm the important role that microfinance plays in bringing the opportunity for entrepreneurship to people who otherwise might not have it, Bernanke said, according to prepared remarks.
Similarities and Differences
On the heels of last year's high profile Nobel Peace Prize award to Â´banker-to- poor' Dr. Muhammad Yunnus, Bernanke elaborated on some of the similarities and differences between microfinance in the United States and in developing countries.
While the social and economic contexts may vary, microfinance programs are designed to provide small loans and other services to low-income people to help them boost their income through entrepreneurship and self employment, he said.
Yunnus' Grameen Bank in Bangladesh, offers collateral-free loans, mostly to women in rural areas. Grameen began as a project in the 1970s by offering a $27 in loans to 40 extremely poor Bangladeshis. Bernanke noted that in contrast to developing countries, U.S. entrepreneurs may have alternative sources of credit, including credit cards and home equity credit lines.
Beyond credit, Bernanke said that microfinance in the United States, which began with experiments in the 1980s and 1990s, has evolved to deliver education, training and other services, driven by more complex financial requirements in the U.S. such as taxes, licenses and zoning laws which can be a hurdle for business owners.
Thus, while lending remains a very important part of U.S. microfinance programs, it is not as central to the broader mission as is typically the case in the developing world, Bernanke said.
Until now, services provided by microlending operations have been supported by philanthropy and public-private partnerships.
Whether U.S. microfinance programs can become financially self-sustaining is a key question for the future, he said.
Organizations have sought to reduce costs by using technology for online transactions, training and distance learning, matching borrowers and mentoring organizations. Microlender partnerships with mainstream banks could also emerge as referral systems to break down barriers between large banks and underserved entrepreneurs.
Bernanke said that aggregate data about U.S. microfinance as a whole was scarce, but noted that the Accion USA network, a non-profit organization, has loaned $180 million to nearly 20,000 borrowers in thirty-five states since 1991.
The Accion Texas branch loaned $42 million between 1994 and 2005, generating earnings of $25 million and local tax revenue of $4.5 million. AcciÃ³n is one of the largest Microfinance operations in the U.S. and offers business loans to individuals starting from $500.