Microfinance programs provide small loans, usually to individuals with lower incomes, to start or expand a small business. In the United States, microfinance is often part of a microenterprise program. Such programs provide loans and educational resources, such as business development training and other technical assistance, to smaller businesses, sometimes called microbusinesses, with fewer than five to ten employees1, 2, 3. Programs are often focused on entrepreneurs with low incomes who experience barriers to traditional lending2. Businesses with fewer than 50 employees make up the largest share of total employment globally3.
Expected Beneficial Outcomes (Rated)
Reduce material hardship
Increased asset accumulation
Increased business assets
Evidence of Effectiveness
Microfinance and microenterprise development programs are a suggested strategy to build business and personal assets1 and reduce material hardship among entrepreneurs with low incomes in the US4. However, more research is needed to determine whether microfinance and microenterprise programs can significantly increase individual income4 and whether individual or group-lending models are most effective in the US2.
Available evidence suggests microfinance group lending may reduce material hardship4 and improve credit scores4, 5. However, evidence on income is mixed, with one study of a microfinance program, Grameen America, finding no impact on individual incomes at 18 months and modest increases at 36 months, with the highest net incomes among women operating a business while also working a wage-based job4, 6. The authors suggest that wage-based jobs paid more than women’s businesses, and that women’s businesses alone did not generate enough income to support their households, although some women intended their businesses to be a source of supplemental income4. Another study of a microenterprise program demonstrated increases in individual income5. Results from the study of Grameen America suggest participation may also increase women’s credit scores, nonretirement saving, business ownership and earnings, and improve well-being4, 6. A study of a refugee resettlement agency’s microenterprise program in the southern US suggests participation increases individuals’ income and self-sufficiency and also provides space for social interaction and support; clients started individual or family-owned businesses, and included women and men, many with previous knowledge or experience5.
A study based in Washington, DC suggests that programs which use a ‘social collateral’ lending model and have less stringent requirements for credit scores, business plans, and mandatory training can still increase access to credit among groups likely to experience barriers, such as immigrant entrepreneurs7. For programs working with immigrants, recommended best practices include offering culturally and linguistically appropriate services, and collaborating with local universities, law clinics, nonprofits, and earlier cohorts to mentor participants and promote businesses5.
More research is needed into the health effects of different lending models, with experts noting that US programs often use individual lending but that group lending may offer beneficial social support2.
In low- and middle-income countries, a review of strategies for financial inclusion, including microfinance, finds that such programs may not have a net positive effect8. In some settings, microfinance may have modest positive effects on income, employment, and asset building9, but other studies find no such effect or negative effects, such as reduced savings8. Additional research finds that microenterprise initiatives can increase the number of women-owned startups but are less successful at improving the quality of women’s existing businesses10. A study in India suggests that motivated and experienced entrepreneurs with existing business are able to scale up with increased access to credit; experts recommend lenders engage these clients in microfinance programs11.
Based on programs in low- and middle-income countries, experts suggest initiatives which bundle business training with financing or technical assistance (e.g., internet access or mentorship) have more positive effects compared with training or financing alone10 and that microfinance programs in the US include a savings component, such as Individual Development Accounts, and job training services, such as Per Scholas or other sector-based workforce initiatives12.
Challenges to microenterprise and microfinance program adoption in the US may include higher labor costs, the expense of banking operations, and risks to participants’ credit history, as well as a technology-focused economy12. Research in both high- and low-income countries suggests that male-owned businesses may be more profitable than those owned by women; this may be linked to women’s greater household and child care responsibilities13. One U.S.-based study suggests that women interested in entrepreneurship are less likely than men to start businesses, and suggests programs offer tailored support for women entrepreneurs to improve their connections to individuals and institutions outside their own networks, in support of their entrepreneurship14.
Community Development Financial Institutions (CDFIs) can serve as microlenders, offering loans under $50,00015 as part of providing affordable and non-predatory financial services in communities16 ignored by mainstream lenders17. CDFIs that receive equity grants from the US Department of the Treasury’s CDFI Fund must offer development services paired with financing, such as microenterprise management18. Microfinance and microenterprise can be part of initiatives aiming to increase household wealth for business owners of color1.
Inconclusive impact on disparities
It is unclear what impact microfinance and microenterprise development programs in the US have on disparities in income and wealth between participating entrepreneurs and those with higher incomes who access mainstream lending and financial services. Microfinance and microenterprise development programs serve entrepreneurs from a range of backgrounds, including women with low incomes6, immigrants7, and refugees5. Although programs are a suggested strategy to increase entrepreneurs’ business and personal assets1 and to decrease their experiences of material hardship4, there is limited US evidence demonstrating impacts on socioeconomic disparities between participants and non-participants, or on disparities in access to financial services over the longer term for entrepreneurs, many of whom experience multiple barriers to accessing mainstream lending. More research is needed on whether programs can significantly increase entrepreneurs’ incomes and whether participants’ businesses replace or supplement wage-based work4.
Microfinance and microenterprise development programs are often part of broader financial inclusion initiatives to increase entrepreneurs’ access to services like credit, savings, insurance, and money transfers from a variety of financial institutions. However, in low- and middle-income countries where financial inclusion programs are more numerous, experts caution that positive effects appear more modest than anticipated and do not appear to be transformative8 or long-lasting33.
Microfinance models are linked to 19th century credit cooperatives34, such as communities in rural Germany that created shared savings funds to provide loans to individuals with low incomes, supporting local financial opportunity and economic stability35. Microfinance as a modern movement34 originated with the founding of Grameen Bank in 1983 in Bangladesh36. The Grameen Bank group lending model aims to reduce poverty by extending credit to those not typically eligible for loans through traditional lenders, usually women with low incomes, to start or grow small businesses36. The Microcredit Summit Campaign of 1997 began a multi-year campaign to reach families in poverty, with most lending institutions in sub-Saharan Africa and Asia and the Pacific. Between 1997 and 2013 the number of microfinance clients increased from 13 million to 211 million, though the proportion of individuals who came from the poorest backgrounds declined34. Since 2006, when Grameen Bank and its founder, Muhammad Yunus, received the Nobel Prize36, microfinance has continued to grow globally (with lenders including government aid agencies, commercial banks, non-profits, and investment firms with social agendas) but has been criticized for prioritizing profitability over assistance for individuals experiencing poverty34.
In the U.S., interest in microfinance and microenterprise continued to increase in the early 2000s with the recognition that millions of households were not participating in, or lacked access to, mainstream banking services. This broadened attention to financial inclusion for households with low incomes, with microfinance and microenterprise among potential solutions. However, the growth of these programs may be limited by the complex, formal, and regulated economy in the US37. An offshoot of Grameen Bank, Grameen America, was founded in the US in 2008 and still operates in 22 cities, including New York City, NY; Los Angeles, CA; Charlotte, NC; and Omaha, NE28.
- Who experiences barriers to accessing non-predatory lending and financial services in your community?
- How could a microfinance and microenterprise program be designed to increase long-term financial inclusion in your community?
- Are there organizations in your community working to meet the needs of the unbanked? How can microfinance and microenterprise programs partner with those organizations to increase financial inclusion?
- How are local microfinance and microenterprise development programs being evaluated? What are the markers of success for participants?
The U.S. Small Business Administration (SBA) Microloan Program offers loans up to $50,000 to small businesses and some nonprofit childcare organizations for business expansion or startup; loans are provided through community-based nonprofits19. The SBA also offers business development resources, including free technical assistance, specifically for Native small business owners through the Office of Native American Affairs (ONAA)20.
Community-based microbusiness development collaboratives can provide borrowers with a network of training, counseling, and loan opportunities. The MicroEnterprise Collaborative of Inland Southern California, for example, includes local banks, nonprofits, universities, community colleges, microlenders, and city and county agencies21. In Georgia, the nonprofit Hack Augusta connects entrepreneurs with funding, training (including coding), and office space and technology though its program the Clubhouse.se22 and supports organizations with business and training accreditation through its program Make Startups23.
Private banks may use philanthropic funding to support local microbusiness development. In Minnesota, the US Bank Foundation is working with local Community Development Financial Institutions (CDFIs) to distribute funding from its US Bank Access Fund to support local nonprofits in their microbusiness development efforts, including the African Development Center of Minnesota24, African Economic Development Solutions (AEDS)25, and the Neighborhood Development Center of Minnesota26. The initiative focuses on women-owned microbusinesses and includes mentorship and technical assistance for women of color microbusiness owners through US Bank27. The nonprofit Grameen America uses a group lending model to provide women living below the federal poverty line with microloans for small business startup or expansion, along with financial training and support in building credit and savings28. Life Asset is a microlending program in Washington DC tailored for entrepreneurs with lower incomes, which uses a ‘social collateral’ model, based on Grameen Bank29.
Examples of Native-led resources include Lakota Funds, the first Native microlender. Lakota Funds now operates as a CDFI, offering small loans, business training and coaching, and other supports for building wealth30. In Oregon, the Native American Youth and Family Center (NAYA) runs a microenterprise program providing business coaching, training, and vendor marketplaces31.
Kiva is a global crowdfunding loan program that can be used by anyone; Kiva reports a high repayment rate (96%) among its borrowers32.
US SBA-District Offices - United States Small Business Administration (US SBA). SBA District Offices. Washington, DC.
Kiva US Hub - Kiva United States (US) Hub. Loans that change lives.
Aspen-MicroTracker - Aspen Business Ownership Initiative (BOI). MicroTracker. Data and tools that enable microenterprise development organizations (MDOs) and their funders to track and assess performance.
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1 Aspen-Klein 2017 - Klein J, Fischer F. Building assets through microbusiness. Washington, DC: Microenterprise Fund for Innovation, Effectiveness, Learning and Dissemination (FIELD), Aspen Institute and Asset Funders Network; 2017.
2 Salt 2014* - Salt R, Lee J. Exploring precarious employment and women’s health within the context of US microenterprise using focus groups. Public Health Nursing. 2014;31(6):556-565.
3 ILO 2019 - International Labour Organization (ILO). Small matters: Global evidence on the contribution to employment by the self-employed, micro-enterprises, and SMEs. 2019.
4 MDRC-Schaberg 2022 - Schaberg K, Holman D, Quiroz Becerra MV, Hendra R. Pathways to financial resilience: 36-month impacts of the Grameen America program. New York: Manpower Demonstration Research Corporation (MDRC); 2022.
5 Idris 2019* - Idris M. A microenterprise initiative among newly resettled refugees in a city of the US South: Challenges, successes, and lessons learned. Annals of Anthropological Practice. 2019;43(2):39-52.
6 MDRC-Quiroz Becerra 2020 - Quiroz Becerra MV, Schaberg K, Holman D, Hendra R. Putting microfinance to the test: 18-month impacts of the Grameen America program. New York: Manpower Demonstration Research Corporation (MDRC); 2020.
7 Tileva 2020* - Tileva A. Anything but micro—no small change: Informality practices at a nonprofit microlender in Washington, DC. Economic Anthropology. 2020.
8 Campbell-Duvendack 2019 - Duvendack M, Mader P. Impact of financial inclusion in low-and middle-income countries: A systematic review of reviews. Campbell Systematic Reviews. 2019:15.
9 Gopalaswamy 2016 - Gopalaswamy AK, Babu MS, Dash U. Systematic review of quantitative evidence on the impact of microfinance on the poor in South Asia. London: EPPI‐Centre, Social Science Research Unit, Institute of Education, University College London; 2016.
10 Brookings-Revenga 2020 - Revenga A, Dooley M. What works for women microentrepreneurs? A meta-analysis of recent evaluations to support female entrepreneurship. Global Economy and Development, Brookings Institution. 2020: Working Paper 142.
11 NBER-Banerjee 2019 - Banerjee A, Breza E, Duflo E, Kinnan C. Can microfinance unlock a poverty trap for some entrepreneurs? National Bureau of Economic Research (NBER). 2019: Working Paper 26346.
12 Matjasko 2020 - Matjasko JL, D’Inverno AS, Marshall KJ, Kearns MC. Microfinance and violence prevention: A review of the evidence and adaptations for implementation in the US. Preventive Medicine. 2020;133:106017.
13 NBER-Jayachandran 2020 - Jayachandran S. Microentrepreneurship in developing countries. National Bureau of Economic Research (NBER). 2020: Working Paper 26661.
14 Kim 2014a* - Kim SM. The impacts of gender differences in social capital on microenterprise business start-up. Affilia. 2014;29(4):404-417.
15 FRB-Galloway 2020 - Galloway I, Sanchez-Moyano R. Understanding community development financial institutions and their impact in low- and moderate-income neighborhoods. Federal Reserve Bank of San Francisco, Community Development Innovation Review. 2021;15(1).
16 Urban-Dev 2016 - Dev J. The unsung financial institutions that fund inclusive community development. Urban Wire: Finance. Washington, DC: Urban Institute; 2016.
17 Urban-Theodos 2017c - Theodos B, Hangen E. Expanding community development financial institutions: Growing capacity across the US. Washington, DC: Urban Institute; 2017.
18 Harger 2019* - Harger KR, Ross A, Stephens HM. What matters the most for economic development? Evidence from the Community Development Financial Institutions Fund. Papers in Regional Science. 2019;98(2):883-904.
19 US SBA-Microloans - United States Small Business Administration (US SBA). Loans & grants. Microloan program. Washington, DC.
20 US SBA-Native - United States Small Business Administration (US SBA). Native American-owned businesses. Washington, DC.
21 MicroEnterprise Collaborative - MicroEnterprise Collaborative of Inland Southern California. About MicroEnterprise Collaborative.
22 Clubhou.se - Clubhou.se. A new model for small and mid-sized communities. Augusta, GA.
23 Make Startups - Make Startups. Powered by the Clubhou.se Labs. We accredit organizations that make startups.
24 ADC MN-Business - African Development Center Minnesota (ADC MN). Start a business. Minneapolis, MN.
25 AEDS-Business - African Economic Development Solutions (AEDS). Redefine your business through our programs: Supporting entrepreneurship within the African community. St. Paul, MN.
26 NDC MN - Neighborhood Development Center (NDC) of Minnesota. Building neighborhood economies from within. St. Paul, MN.
27 US Bank-Access Fund - US Bank. US Bank Access Fund to deploy $25M to support 30,000 microbusinesses. 2021.
28 Grameen America-Program - Grameen America. Our program.
29 Life Asset - Life Asset. About Us. Washington, DC.
30 Lakota Funds - Lakota Funds. Our Story. Kyle, SD.
31 NAYA-Microenterprise - Native American Youth and Family Center. Microenterprise program. Portland, OR.
32 Kiva-Lend - Kiva crowdfunding loan service.
33 US GAO-Microenterprise 2021 - US Government Accountability Office (US GAO). Microenterprise and related development assistance: Challenges in evaluating lasting benefits for women and the poor. Washington, DC: US Government Accountability Office (US GAO); 2021:GAO-21-328.
34 Cull 2017 - Cull R, Morduch J. Microfinance and economic development. World Bank. 2017: Working Paper 8252.
35 Seibel 2003 - Seibel HD. History matters in microfinance. Universität zu Köln, Arbeitsstelle für Entwicklungsländerforschung (AEF). 2003: Working Paper 5.
36 FRB-Sengupta 2008 - Sengupta R, Aubuchon CP. The microfinance revolution: An overview. Federal Reserve Bank of St Louis Review. 2008;90(1):9-30.
37 NFI-Chandra 2011 - Chandra A, Arun T. United States microfinance: Regulating to promote growth? Networks Financial Institute (NFI), Indiana State University. 2011: Working Paper 28.
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