The Microfinance Insider is a forum for graduate students engaged or interested in working in the field of microfinance. Through weekly posts and comments we hope to inspire students and foster the creation of a knowledge community of bloggers with a commitment to financial access and first hand industry information.

Wednesday, July 23, 2008

The Character of Domestic Microfinance

Second stop on my whirlwind tour of microfinance institutions—ACCION New York.

ACCION NY was established in 1991 as the domestic branch of ACCION International, a global microfinance NGO that services Latin America, Africa and Asia. In 1996, ACCION NY became an independent organization in order to better address the growing demand for microfinance services within and around New York City.

Today, ACCION NY is one of the largest microfinance institutions (MFIs) in the greater metropolitan area. In 2006, the organization had a loan portfolio of $17,037,888, and had disbursed a total of $65.7 million to almost 6,000 borrowers since its conception seventeen years ago. ACCION NY is responsible for approximately 75% of all microloans issued in New York City.

The size and breadth of the organization’s outreach did not come as a surprise to either myself or my companion in exploration, the FAI research assistant, Lara. As soon as we stepped off the elevator on the seventh floor of the Manhattan office building, we were struck by the flurry of activity. Sixty or so ACCION workers were busy analyzing data, logging numbers, tracking loans, and meeting with clients – all working side by side in an atmosphere that could only be described as efficiently frenzied.

At the receptionist’s desk, we were greeted by Laura, Manager of Communications Projects at ACCION. Unable to find an empty meeting room amid the hustle and bustle of the office, Laura herded us into the office’s pantry where she patiently proceeded to answer our long list of questions.

We learned that ACCION receives funding from a number of commercial and governmental sources, but about sixty percent of the organization’s operational costs are covered by self-generated profits. The MFI offers a variety of loan products, including business term loans, lines of credit, start-up business loans, and small credit development loans. Loans range from $500 to $50,000, though tend to average from between $7,000 to $10,000. Once a client is issued a loan, that client is monitored through formal accounting procedures and occasional check-ins with loan consultants until the loan is repaid. During the life of the loan, ACCION provides clients with a range of educational services that include financial literacy training and business plan development.

ACCION, like NYANA (see July 14th post) has managed to provide residents of NYC with efficient and effective microfinance services. It has done so by successfully adapting the Grameen model to fit the needs of clients operating within the U.S. business sector. For those unfamiliar with the Grameen model, let me take a moment to explain:

The Grameen Bank of Bangladesh, started by economist Muhammad Yunus in 1976, is considered the founder of microfinance. The Grameen model of microlending is based upon a couple key elements: the lending-out of small sums of money over a relatively short period of time, frequent incremental repayment periods of days or weeks, monitoring and collection meetings orchestrated by local loan agents, group-lending where joint-liability replaces the need for collateral, and a predominantly female clientele that hails from the lowest echelons of society.

For a number of economic, structural and cultural reasons, the Grameen model is very effective in the developing world. However, New York is not Bangladesh—a whole different set of constraints operates here. U.S.-based MFIs have therefore been forced to alter and adapt the Grameen model in order to best address the needs of their domestic clientele.

The first and most obvious difference between international and domestic microfinance is the size of loans—domestic microloans tend to be substantially larger than microloans abroad. Whereas a Grameen loan of a couple hundred dollars can sustain a Bangladeshi family business for a year, an ACCION loan of a similar size could achieve no such thing in New York. The costs of starting-up and maintaining a business in the U.S. are simply much higher than in the developing world.

Secondly, domestic MFIs issue microloans to individuals rather than to groups. This is a result of the formality of the U.S. business sector, specifically with respect to credit history. In the U.S., individuals must possess a credit history in order to access many basic services from a credit card to a home loan. But for foreigners living in the U.S., credit histories are notoriously hard to establish. One of the main goals of ACCION and other domestic MFIs is to give clients the opportunity to establish a credit history, hence individual-based lending schemes.

Another consequence of the formal nature of the domestic business sector is that domestic MFIs are unable to work with the very poorest of the poor. Because of the operational costs of running a business, paying taxes, and the general expenses of the domestic formal sector, recipients of microloans in the U.S. tend to be relatively better-off than their international counterparts.

And finally, while MFIs abroad disproportionately lend to female borrowers, U.S.-based MFIs have a much more balanced gender breakdown. For example, in 2006, only 40% of ACCION’s clients were women, a figure that is roughly parallel to the gender breakdown of the New York City business sector.

For all these reasons and many more, domestic microfinance is a very different phenomenon than international microfinance. ACCION NY is emblematic of a U.S.-based organization that has managed to efficiently and effectively adapt the international model to best serve a domestic, urban clientele.

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