How to Boost Microfinance in the United States

The Council on Foreign Relations

Since it first emerged in its modern form in Bangladesh in the 1970s, microfinance—the practice of providing financial services like loans, insurance, and savings accounts to low-income individuals or groups who are traditionally excluded from the banking system—has become a multibillion-dollar global industry. In 2018, there were around 140 million microfinance borrowers worldwide (80 percent of whom were women) accounting for a total of $124 billion in loans. In many ways, this is unsurprising. After all, even today, there are over 1.7 billion adults worldwide who are financially excluded…..

…..Even when there is a potential market for microfinance, the question is whether it is suited to developed countries like the United States. Many argue that practices like group lending require a level of social solidarity that is a better fit for developing countries. To study this, the MDRC, a social policy research organization, conducted an in-depth study of those who borrowed from the pioneering microfinance institution Grameen Bank in Union City, New Jersey—primarily low-income Latina women immigrants.

The study found that recipients were more likely to operate their own business, see a modest increase in income, experience fewer material hardships such as running out of money in the preceding three months, and afford basic necessities. They were also more likely to have established a credit record, a “prime” Vantage score (an alternative to the FICO credit score) that allowed them to access mainstream financial markets and lower interest rates, deeper relationships with members of their loan groups, and broadened social support systems. The study results demonstrated that microfinance can work to improve the lives of low-income individuals, even in developed countries like the United States…..

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