Micro-lending giants in the developing world, such as the Grameen Bank founded by 2006 Nobel Peace Prize winner Muhammad Yunus, have received a great deal of publicity. At one point these efforts – usually tiny loans of a few dollars to help start a one-person business – were seen as a possible cure-all for poverty. But, perhaps predictably, as more companies have seen opportunities to make money and entered the business, micro-loans in poor nations have come under criticism as sometimes exploitative and poorly managed.
Fewer people know that micro-lending is alive and growing in the United States, where it competes in a much different, highly sophisticated and crowded financial marketplace. In 2008, 362 micro-lenders in the US made more than 9,000 micro-loans totaling just over $100 million.
Each loan keeps or creates 2.4 jobs on average, according to the Opportunity Fund, a micro-lender that operates in the San Francisco Bay area. While mainstream bank lending dropped by 77 percent in California during the recent credit crunch, the lending by the Opportunity Fund increased 56 percent, it says.
In a phone interview, Eric Weaver, the founder and CEO of the Opportunity Fund, talked about how micro-lending and micro-saving works in the US, who it serves, and why it's helping low-income people stay out of financial trouble.
What is the Opportunity Fund?
Eric Weaver: We're a not-for-profit institution based in the Bay Area of California. We have been in the micro-lending and micro-savings business starting in 1995. We've now lent out nearly $20 million to micro-businesses in the Bay Area to about 1,500 borrowers.
We've also enrolled about 3,400 low-income people into our micro-savings program. We're one of the largest micro-savings providers in the US.
[Editor's note: The original version misstated the number of people in the micro-savings program.]
Who funds you?
The money to lend comes primarily from large banks, either in the form of loans or grants. Some of it comes through what is called the CDFI Fund (Community Development Financial Institution), something that was created under [President] Clinton to invest in community development.
We've also had some loans from foundations. That's where the money to lend comes from. And we're also getting some money from the SBA [federal Small Business Administration] to lend out. So it's a mix of public and private capital.
What's your savings program like?
The savings program is a matched-savings program where we provide people with a reward or incentive for saving and actually match their savings [with donated funds].
A one-to-one match?
Actually, two to one.
So if they save $10 you give them $20?
We set $20 aside in a parallel account and when they complete the program they can use the money for an approved purpose.
So they have to learn about how to manage money along the way?
Yes. And they need to save monthly over an extended period of time so that they're really developing a behavior pattern.
How many people are in the savings program?
Currently, about 700 to 800.
Did the banking and mortgage loan crisis in recent years affect you?
It's meant that there's a new category of borrower that we're lending to. We've always talked previously about the "un-banked" or the "under-banked" client who's really not in the financial system or could not qualify for conventional financing.
There's a new category now called the "formerly banked." So we've actually seen our average loan size go up since the mortgage crisis and the credit crunch. It doesn't mean we're moving away from our core target market, which is really disadvantaged entrepreneurs. But we've really added another category of borrower.
What's your loan size?
It's now up to about $12,000, and historically it's been more like $7,000.
What are people doing with the loans?
Most of what we do is lend to people expanding businesses. Some definitely are starting businesses. So it could be anything from an in-home child-care business to a mobile food cart, that's a big one theses days. It could be an independent truck driver who makes $35,000 a year and [needs major repairs on his rig]. We have one client who runs a medical training school, where she's training people how to draw blood or read CT scans. It's helping a lot of people get into the work force.
Is there an income limit for borrowers?
There isn't. The median [annual] income of our borrowers is less than $30,000 in a region where the median income hovers close to $80,000 to $90,000. With the savings program there is an income test.
That's our newest saving product. There are a lot of clients we see who aren't ready to save for college or buying a home but who can benefit from developing a savings pattern and accumulating a small cushion for emergences. So this is the first time in the US where we're running a matched-savings program where the goal simply is a rainy day fund or emergency fund account. We believe it will help people stay away from payday lenders or losing jobs because of emergency car-repair or child-care needs or something like that.
Why offer micro-saving as well as micro-lending?
You're not going to get out of poverty solely through borrowing. Most people aren't entrepreneurs. But they are still going to need capital to allow them to weather crises. Credit is a double-edged sword. It can be beneficial in some cases and damaging in others.
Do you have more demand than you have funds?
On the savings side we have unlimited demand. Government policy provides major incentives, such as mortgage loan tax deductions or tax-free IRA savings, to well-to-do people but doesn't provide them to poor people.
Do people complete the course that teaches them how to be better savers?
Yes, we have about an 80 to 85 percent completion rate for people who complete the course and earn the matching funds. We also did a study of graduates two years out and found that 70 percent of them were still saving on an average of 10 percent of their monthly incomes, which is really high.
We also have people saving up the cost to attain US citizenship. Citizenship can be a real asset from an employment perspective.
How did you come to found the Opportunity Fund?
I was a relief worker in El Salvador and then doing affordable housing development in Washington D.C. Then I was in Stanford University's public business program that trains people for government and nonprofit work.
We think of micro-finance efforts taking place in very poor countries, such as India. Is micro-lending in the US pretty far under the radar?
It's much smaller here. In some countries institutions have been able to go to enormous scale because there has been a lack of financial services of any kind. We've found the group-lending model that's been so successful abroad doesn't appeal to people starting businesses here. This country, by and large, is awash in financial services. A lot of them aren't really very good for people, but it's hard to get your message out amongst the noise and get people to trust you that you have their best interests at heart.
But [micro-finance] is building steam here. I think the recession has brought more and more attention to micro-lenders with banks stopping lending. We think this is our moment to move to a new kind of scale. We've seen growth in the 50 percent per year area.
Thankfully we don't have many people in the US living on $2 a day [as in some countries] but that doesn't mean there isn't a need here.
What's your response to the turmoil in the international micro-lending scene, which includes some studies that question its effectiveness?
Everyone is always quick to jump on the bad news. There have been other studies that have shown positive impacts. I think part of micro-finance's problem has been that it's been oversold and overhyped, especially internationally. Micro-finance is not a silver bullet. It's not the panacea to end poverty, and I'm glad people are seeing that.
• This interview has been edited and condensed.