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May 11, 2010

Bringing It All Home: The Challenges of Microfinance in the US

By Emily Riemer

At the Chicago Microfinance Conference last Friday (at University of Chicago’s Booth School of Business), a panel of experts from four domestic microfinance organizations discussed the ongoing challenges of offering financial solutions to underserved individuals in the United States. The panel “Microfinance in the US: Where Are We Now and How Far Can We Go?” was moderated by Robert Spich of the UCLA Anderson School of Management.

The panelists explained their organizations’ unique challenges and goals…

ACCION ChicagoJonathan Brereton, Chief Executive and Lending Officer

The Organization:
ACCION Chicago is an alternative lending organization that provides credit and other business services to small business owners who do not have access to traditional sources of financing. It offers loans of up to $15,000 for start-up businesses and $25,000 for established businesses.

Its Challenges:

  • Seventy percent return rates on loans, but not consistently. It is difficult to make the lending sustainable at this point, and to completely cover costs, they would need to raise interest rates.
  • Sixty-seven percent of clients have health insurance, and so some clients feel that the benefits of starting their own business are not worth the risk.
  • Brereton: “We have a responsibility not to give a loan that will hurt someone in the end.”

Safer FoundationJodina Hicks, Chief Program Officer

The Organization:
The Safer Foundation, established in Chicago in 1972, is an advocate for individuals with a criminal record, supporting them in their efforts to obtain employment following release from prison or jail. It has nine locations in Illinois and Iowa.

Its Challenges:

  • People with a criminal record have 35% less earning potential than others, so the small-business model is important because it can be difficult for ex-prisoners to get hired.
  • Two-thirds of released prisoners are out of work, and two-thirds ultimately return to prison.
  • Hicks: “Released inmates are given $10 and a bus ticket, whether they have been incarcerated for a few months or a few decades. Without support, they may turn to drug loans to pay for their small businesses.”

FUND ConsultingLolita Sereleas, Founding Partner

The Organization:
FUND Consulting is a women-owned small business providing research and consulting services to mission-driven organizations worldwide. It provides both strategic and tactical assistance grounded in research to community banks, credit unions, CDFIs, municipalities and other organizations seeking to maximize and measure their community impacts. A significant part of their work is in the Native American community.

Its Challenges:

  • Many Native Americans have no prior relationship with financial institutions. This may lead to a lack of trust in these organizations.
  • Sereleas: “No one has figured out how to do this without subsidy.”

Progreso Financiero- James Gutierrez, Chief Executive Officer

The Organization:
It issues small-business and individual loans of up to $2,500 in the Latin American community in California and Texas. Its stated mission is to take a responsible approach to lending. It aims to provide customers with upward mobility and opportunity, achievable only if they are able to pay back their loans and maintain good credit histories.

Its Challenges:

  • Gutierrez describes his clients as “people without a face,” in terms of their lack of credit history. Therefore, they are launching an upcoming program to offer their loans on secured, pre-loaded Visa cards, in order to help them build their history.
  • Like many microfinance organizations, Progreso utilizes a socially enforced model – when they give a loan, they take a photo of the client holding a big check, and their families and the community is invited to the ceremony. This encourages clients to pay back loans responsibly.
  • Many clients are seasonal workers, and they are difficult to underwrite because their income is sporadic.

Offering microfinance solutions to the underserved in the US continues to present challenges and rewards. Highlighting the challenges, James Gutierrez told the audience, “We must send a message to the financial community: ‘There is financial opportunity here. Let’s see if we can make it sustainable.’”

Do you have comments about microfinance in the US? Please share it in the comment form below.

Check back in tomorrow for Opportunity‘s ongoing coverage of last Friday’s Chicago Microfinance Conference.