The American midwest is the new microfinance frontier

american microfinance

Jesus Castro in Des Moines. Entrepreneurial immigrants in America’s midwest are finding it hard to access traditional finance. Could microfinance be the answer? Photograph: Bread for the World

Modern microcredit was born in Bangladeshi villages during the 1970s and spread during the 1980s to the Andean highlands of Bolivia. During the 1990s microcredit evolved into microfinance as it grew to include financial services such as insurance and money transfers at the same time as it earned increased support as a global poverty-reduction tool. In 2006 modern microcredit came full circle when its progenitor, Muhammad Yunus. won the Nobel Peace Prize.

Today microfinance – which aims primarily at providing financial services to the poor – is expanding into a new market that is as un-exotic as it is unexpected: the American midwest

Solidarity Microfinance – which had its grand opening in Des Moines in October – and other budding midwest microfinance organisations are adopting the tools born in Bangladesh and nurtured in Latin America to target a growing and untapped population in the American heartland: aspiring immigrant entrepreneurs.

The Hawkeye state might seem like an unpromising site to launch an entrepreneurship initiative. In 2013 it had the lowest rate of entrepreneurial activity in the county with 110 adults per 100,000 starting businesses compared with the national average of 280.

But Iowa has a growing immigrant population and data consistently shows immigrants to be more entrepreneurial than the US-born. Even as entrepreneurial activity declined across the country during 2013, immigrants were almost twice as likely to start businesses as the US-born. And immigrants are among the fastest growing components of Iowa’s population. Between 2000 and 2010 Iowa’s immigrant population grew 47% while the overall state population grew 4%. The Des Moines metro area alone includes more than 48,000 immigrants comprising 8% of the population.

But Des Moines’ immigrants’ entrepreneurial drive is unfulfilled due to several barriers – one of the primary ones being the lack of access to small business loans. New microfinance organisations like Solidarity are betting that providing microloans will unlock the entrepreneurial potential of the state’s foreign-born residents.

“I meet a lot of women who had this kind of talent … they wanted to make money by selling food, making clothing, but there was just no way for them to do that because their option would be take out a large loan at a bank and that’s something that they just couldn’t afford to do,” said Solidarity Microfinance program coordinator Ana Mancebo.

Traditional bank loans are too onerous for low-income immigrants to manage, Mancebo said. And the small start-up loans that many Des Moines immigrant entrepreneurs are seeking are not worth banks’ effort according to Solidarity Microfinance board member and advisor Mark Edelman. “The cost of technical assistance and staff are more than the loans that are made, and that’s why banks don’t

do this,” he said.

Edelman said that Solidarity will initially seek to work with 300 clients whose main requirement will be family income under $37,450 (£23,320) per year. The twin goals are to reduce participants’ poverty rates while facilitating increased economic activity in Des Moines. Participants do not need credit histories, complex business plans, or citizenship to engage Solidarity’s small business loans, financial literacy workshops, and free savings accounts. Edelman said program participants should see credit scores increase to 670 within six months and family income increased by $2,500-3,000 (£1,600-£1,900) within a year of participating in the program.

Jesús Castro of West Des Moines is the type of immigrant entrepreneur who could benefit from the growing Midwest microfinance trend. He arrived in the United States in 1983, leaving behind the family’s small farm in Michoacán, Mexico. Castro worked on the almond harvests in California for several years before landing in Iowa in 1994. “California had a tight job market,” he said. “I came here for opportunity.”

He did a variety of jobs before deciding to go into business for himself: meat processing, dish washer, building maintenance. Castro decided to open his small grocery store out of his house after noticing its strategic commercial location on a West Des Moines main street. He started without business training and relied on his personal savings.

Nine years after opening his grocery store, “La Michoacána,” Castro is earning more as a manual labourer, but even as he is better able to support his family, his desire to grow is hindered due to lack of additional capital and the difficultly of navigating red-tape.

Castro wants to expand his store to include an outdoor seating area because the ready-to-eat Mexican food he provides is his top revenue generator. But that would require additional investments and lots of paperwork. “It’s difficult to save money to grow,” Castro said “People are saying they want me to change to a restaurant but it’s a lot of money.”

It remains to be seen whether the growth of midwest microfinance organisations will succeed in harnessing clients like Castro’s entrepreneurial drive, but midwestern immigrant entrepreneurs have a growing number of options to finance a new or growing business.

According to analysts this can only be beneficial to generating economic activity in the state. “Wherever you find immigrant growth you’ll find entrepreneurship,” said Iowa State University researcher Sandra Burke. “Some of the storefront businesses…in [rural Iowa] would not be there without immigrant entrepreneurs.”

Andrew Wainer is a senior immigration policy analyst for Bread for the World Institute

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