Making Micro Credit work in the US
Posted on May 13, 2008 - Filed Under Business |
In 2006, Muhammad Yunus and the Grameen Bank were granted a joint Nobel Peace Prize for their for-profit work in helping to eradicate poverty through Micro Credit. The concept of micro credit is pretty amazing. That is, instead of giving poor people money in the form of donations and handouts, give them business loans so that they can create their own economic prosperity.
Most banks would not waste their time with super small loans to very poor people, but Yunus figured that $27 dollars (the size of the first loan he gave) could change the lives of the people that he loaned to, and he could also make it profitable.
To date, the Grameen Bank has loaned out around $7 Billion to people in developing countries to help them form their own economic prosperity. This is an incredible idea that destroys the idea that social reform cannot be a for-profit venture.
But while I love the idea of micro credit, I am still trying to wrap my brain around how you could apply market prinicples to help the disadvantaged in America?
How Micro Credit Works
Microcredit is a principle that works under an economic principle called arbitrage. Simply put, arbitrage is when you take an asset and re-position it to an area where it is of more value.
The best that $20 dollars in America can buy you is approximately 2 movie tickets or 2 hours of a college kid’s time…etc. However, $20 dollars in Morocco is a small fortune from which to start a very lucrative and financially viable business. Microcredit is arbitrage at its best.
Microcredit also does two things to make sure that money is not being thrown away because at the end of the day, a $20 investment is still an investment and you would like to see a return on your investment.
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training:
most microcredit loans also come with some sort of training so that the people who are given the loans are given a means by which to repay the loan. This typically includes some sort of simple vocational training like sewing or fishing.
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support:
microcredit is also typically given to a consortium of individuals who are all responsible for the repayment of their loans. This means that there is a support mechanism to make sure that people are not defaulting on their loans.
Even though it may sound like a “risky” investment, Micro credit has extremely high repayment levels. When I was working for a non-government agency I knew several microcredit organizations that had repayment rates at above 98%.
I don’t think I would be able to put a definitive answer down as to why microcredit is so successful, but it is. Giving money to poor, uneducated people is almost the epitome of a bad investment, but these poor, uneducated people are paying back their microcredit loans at a better rate than Americans are paying their mortgages.
Can Microcredit Work in America?
I have lived in the inner city, as well as parts of various Native American reservations, and one of my major concerns has always been the economic disadvantage faced by many people in lower income regions. It may seem very easy to judge from the comfort of suburbia (I find myself slipping into it often) and say that poor people in America have every advantage available to the average American and that people in third world countries are more deserving, but if you were to experience it you may not agree
My point is not that we should give less to third world countries, but that we should be doing more to help the poor among us. Better yet, how can we make the principle of microcredit work in America?
One problem is that the principle of arbitrage does not necessarily work 100% with our poor. $20 dollars is a small fortune for someone in Haiti or Morocco, but it is still just $20 for someone in the Bronx.
I have been stumped about this for quite some time, and I have some ideas, but nothing perfect. I need the collective wisdom of the internet to help me. So I will openly share my ideas, hoping that someone somewhere will read this and be willing to give some feedback and share some insight.
Micro Venture Capital
When I was thinking about the problems with stimulating the economy in lower-income areas here were the following ideas that I had flowing through my head:
- I did not want to train people to become employees, I wanted to train people to become entrepreneurs. Helping somebody land a menial job is not nearly as stimulating to the local economy as helping somebody create a profitable small business.
- Small, community based businesses are key. Not to say that the businesses cannot become huge, that would be ideal. However, when the goal is simply to lift someone out of poverty, we are not needing to find the next google.
- businesses must address real problems that low-income communities face and must be as pre-packaged and as turn-key as possible in order to decrease the chances of failure. Also, the businesses must be able to start up with a small amount of capital, around the $10K figure.
- Sharing equity in the businesses may be a better idea because it gives the venture capitalists a greater incentive to be active in the small businesses’ success, and it will lead to greater profits in the long-run for investors.
- If you can start the business with a small amount of capital, then success is measured in how many $100K a year businesses you can start, not how many $1B a year businesses you can start with a larger scale venture capital model.
So this is kind of just a brain dump…I really need some feedback to see if this is feasible? I just think there has to be an answer to helping to alleviate the devastation of poverty in this country without just blindly putting on economic band-aids in the form of well meaning but inefficient non-profit organizations, wasteful government programs, and meaningless $600 stimulus checks.
I think that not many people have gotten to the root of the problem, that is that many people in poor communities don’t know how to create a sustainable living for themselves and do not have the means to seek out higher education, so they get stuck in the rat race of hopping from menial job to menial job and relying on others to determine their financial future.
So once again. I do not claim to have the answer to poverty. However, I would like to explore how we can find a market based solution to overcome it.
If you have any ideas or feedback feel free to comment or email me at richisthenewblack@gmail.com
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