The recession should be an opportunity to reconsider how we loan money here in the United States, but it probably won’t. That said, I hope that the various stimulus packages expand microfinance, both domestically and internationally.
Microfinance works in a number of ways, but fundamentally consists of relatively low-value deposits and/or loans made by individuals, to individuals. For example, Zopa, a UK-based company, provides a space for individuals to loan each other money within their own countries (usually). [Similarly, Kiva is a pioneering microcredit organization based out of San Francisco that allows people to loan money to individuals, especially entrepreneurs (often women) in the developing world. For this discussion’s purposes, I’ll focus on the domestic lenders.]
UK Zopa’s average APR (not redundant) is approximately 8%, the vast majority of which goes back to the lender. Therefore, the individual who loans the money out gets a significantly higher return than she would with the average checking or savings account, and is guaranteed growth, as opposed to when investing in riskier stocks. Finally, because many of these loans are in relatively small amounts (often even less than $1000), lenders can anticipate a shorter repayment period and thus see an investment on their return much faster than most bonds or CDs.
A lot of these loans are so small or for seemingly-random purchases/investments that traditional banks will often not loan the money. This leaves the borrower with two choices: do without, or put it on a credit card. Seeing as my credit cards’ APRs are hovering around 26% (kill me), I’d much rather try to find a Z0pa-type loan to, for example, cover unexpected medical expenses, than put it on my AmEx.
To summarize how Zopa works: a higher rate of return for the investor, significantly less debt for the borrower, and a quarter of the average unpaid debt rate (depending on the country, but generally true, so far).*
Anyway, you can get a much more comprehensive idea of how microfinance works from Wikipedia or Google or something. To get to my actual point…
If Congress hasn’t done so already, it should encourage microfinance in some of this damn economic recovery legislation. While microfinance is definitely taking off, I’m pretty sure that a hell of a lot of people have never heard of it, and nearly as many would be interested in it. People hate faceless, behemoth corporations, and especially seeing at how badly Big Banking has failed this time around (especially when compared with the nation’s smaller, community banks and credit unions), I’m confident that millions would be excited to see a safe, profitable venue for investing their money, and millions more would love to borrow money for a new car, wedding, education, re-training, unemployment, childcare, whatever.
Another cool thing about Zopa and Kiva is that both allow you to browse potential borrowers’ profiles and proposals for loans. You can invest in a small percentage of one project, spread your risk across various investments, or even fully fund just one loan. This transparency allows for a more human touch, and would enhance the democratization of responsible credit. Like Donorschoose.org, a godsend for us (well, not me anymore, I guess) public school teachers, projects that lenders consider valid would receive priority funding. When individuals are choosing to fund each others’ proposals, we should see much less reckless lending than we have traditionally — at the end of the day, these investors will be extremely careful, as it is their own money on the line, not .000000001% of 4 million Bank of America clients’.
Furthermore, breaking monopolies is only good for the United States’s long-term fiscal health. A commonly-recited mantra has been that influential corporations, whether banks or automobile manufacturers, are “too big to fail.” If we create a financial world in which everyone could lend and everyone could borrow, it would ensure that a few banks do not monopolize all Americans’ financial security. That said, it’s highly doubtful that microcredit will ever take the place of traditional big banking. However, that’s not really the point. Ensuring that all creditworthy individuals have access to credit they need to invest to create growth will ultimately benefit not only the individual borrowers, but the state, as well. Little loans here and there bolster individuals, individuals invest in their communities, communities create lively markets, and on and on.
Finally, decent human beings feel much more indebted to individuals than we do to corporations. I don’t want to pay my credit card bills, partly because I don’t make enough, but also because I resent the cards; I resent corporations that were silly/smart-evil enough to give a 19-year-old scholarship student $4000 in credit; I resent my 26% APR, $35 late fees, and $35 overlimit fees; and I resent the fact that I have busted my ass for the last 30 months, putting 50% of my paychecks toward paying off said debt, and yet still owe $1200, after my checking account shows me I’ve paid $10,000. (This paragraph could also be summarized as “fuck you, you evil geniuses, and fuck me for listening to you!”) I would be much happier about paying back my loans if I knew the money was going back to helping individuals, instead of paying for an overextended apparatus’s out-of-control administrative and bureaucratic expenses.
Therefore, the federal government should encourage microfinance because it:
1. Stimulates lending, often for projects traditional banks won’t fund, and provides a significant return on investment for lenders;
2. Stimulates buying, by throwing the few extra hundred or thousand dollars a borrower needs to pay tuition, start a business, fix a car, get married, or anything else both lender and borrower deem worthy;
3. Distributes low levels of risk among individuals performing independent transactions, which helps lessen the power of a few megabanks and serves to prevent further financial monopoly;
4. Encourages community transactions and domestic investment.
The federal government could provide financial incentives for microfinance, such as not taxing lenders’ profits, or treating microfinanciers’ investments like mini-501(c)(3) organizations. Or, if it wants to spend even less money, it could at least help publicize this option and legitimize it so that more people view it as a trustworthy market. (After all, if nobody trusts a market/country/company, nobody invests in it.) The details aren’t really up to me, now, are they?
However, I must add one caveat. Expanded domestic microfinance could be great for the credit-worthy, which would most likely consist of most of the upper-middle and upper classes, and much of the middle class. However, for investment reasons, individuals with poor or unestablished credit are currently locked out of Zopa, and I’d assume they’re locked out of similar companies’ exchanges, as well. Now, this makes sense, as a market like Zopa will live and die on its investment credibility, and it needs to minimize its bad loans, not only to keep itself afloat, but also to be fair to the individuals who are taking the risk by lending, even if it is ensured.
That said, I would hate for microfinance to be yet another supposed economic savior that just ignores the Americans who need it most. Therefore, I’d hope that, as these new marketplaces expand, they include special sections where individuals deemed unsuitable for credit lines are at least given an opportunity to present their proposals — a Craig’s List of loans, if you will. Maybe this portion of the marketplace would be uninsured and not provided 501(c)(3) status, and individual lenders would know they were lending at their own risk. If people are willing to take this chance, they should be allowed it.
Furthermore, it would be a good idea to include another division that’s devoted exclusively to creditworthy individuals who can prove their proposals will benefit those who are unable to get loans. For example, if someone wants to start a new business in the neighborhood, she can demonstrate that she will ensure that 80% of new hires live in said neighborhood; or maybe you just want to fix your car, but instead of taking it to the dealer you want to have the car-genius-kid-next-door fix it and keep the money. OR!, best of all, people who want to start check-cashing businesses that are actually benevolent, instead of bestowing these ridiculous 1000% (not a typo) interest rates on people who need cash straightaway and then get sucked into an eternal debt cycle — even have a check-cashing division on the site!
In the end, when we’re talking about any institution of the formal economy, it’s probably going to benefit the middle-class-and-up more than it does the working (or unworking) poor. Even in this light, expanding microcredit’s reach sounds like a great start.
*I got my stats from Zopa, but let’s hope they’re true: http://uk.zopa.com/ZopaWeb/public/lending/why-its-safe.html