Maria’s homemade cheese business flourishes with the infusion of a $1,500 loan. Silva, a former dry cleaning worker, is pursuing an ice cream vending venture. These are not stories of struggling microfinance clients in developing countries such as the Philippines or Peru. Maria and Silva are part of an expanding pool of borrowers, who are tapping microloans to realize the American dream.  

Microfinance is gaining recognition as a tool to revitalize local businesses and communities, especially in the wake of the Great Recession, which has led to widespread unemployment and credit tightening. 

For decades, microfinance has been used to alleviate poverty in the developing world. The genesis of the Grameen microlending model can be traced to the 1970s, when Nobel laureate Mohammed Yunus was moved by the exploitation of borrowers by loan sharks in his home country, Bangladesh. In response to the dire situation, Yunus organized the borrowers into groups, wherein a collective, morally binding guarantee would be a substitute for collateral.

Group-based microlending is now being popularized as a financial innovation in the U.S. Individual microloans in the U.S. can be as high as $50,000. Realizing the latent demand for accessible and affordable capital, microlending organizations are reaching out to unbanked and underbanked communities in cities such as New York, Omaha and the San Francisco Bay area. 

Iowa Community Capital is now working to launch a peer-lending program in Des Moines. 

The New York-based nonprofit Grameen America offers $1,500 loans at an annual interest rate of 15 percent.  While group-based microlending is often beneficial for impoverished borrowers who have neither collateral nor a credit history, microlenders such as Accion are also stepping up efforts to provide individual microloans to borrowers who need to graduate into the mainstream U.S. banking system. 

Fueling microenterprise in Iowa

Microlending is still in a nascent phase of growth in Iowa, where there is potential for creating jobs for over 110,000 micro-entrepreneurs, according to the Corporation for Enterprise Development. At the grass-roots level, micro-enterprises help perpetuate a virtuous cycle of job creation and economic revival in the small towns of Iowa. Micro-entrepreneurs are generally more predisposed to purchase locally, support local philanthropic initiatives and reinvest in their communities, said Amelia Lobo, director of ISED Ventures’ Women’s Business Center. ISED is an Iowa asset development organization helping low- and moderate-income Iowans build assets and achieve financial stability. 

Families running micro-enterprises can acquire assets and enhance wealth for future generations. Women and minorities, who are socio-economically marginalized, would be able to escape poverty by establishing micro-enterprises. Access to capital is a critical success factor for micro-enterprises, which make up 80 percent of the businesses in Iowa.  

Lobo says micro-entrepreneurs play a key role in the Central Iowa economy. 

“I believe Des Moines in particular owes its success in attracting and retaining professional talent to the micro-businesses that make this a great region to live,” she said.

The clientele in Central Iowa is extremely diverse, so microfinance institutions need to develop effective marketing strategies. In order to penetrate different market segments, microfinance institutions have to provide services in different languages, create sector-specific loan products, and promote leadership and capacity building among their clients.

The way forward

Microfinance institutions worldwide are looking beyond credit-based product development to provide low-income groups a broader range of money management tools. Microsaving products are emerging as game changers in the field of financial inclusion, as millions are still struggling to cope with irregular and unpredictable cash flows. American microfinance players should take a cue from the above global trends and help their clients develop strategies for smoothing consumption and generating assets.