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University of Southern California
School of Policy, Planning, and Development
Los Angeles, CA 90089-0626
* The authors thank the Southern California Studies Center for funding this research. We appreciate
The Microcredit Challenge:
A Survey of Programs in California
Beginning with the “War on Poverty” era in the 1960s and 1970s, alternative
credit programs have been used to extend credit to small businesses that were denied
access to the traditional banking sector. More recently, the US Department of
Commerce’s Economic Development Administration has created a number of local
revolving loan funds that extended credit to entrepreneurs in low-income communities.
The Small Business Administration (SBA) has also been lending to small businesses for
many years, especially those run by women or members of minority groups. In addition,
various state and local governments have also created loan programs targeting
entrepreneurs who have not been able to access the traditional credit markets. The State
of California, for example, has established regional programs that provide technical
assistance and guarantees for small business loans made by private financial institutions.
At the local level, many cities and counties throughout California have their own
ACCION International. The hope is that these programs will play a key role in poverty
alleviation and economic development of disadvantaged communities. With the recent
welfare reform, some also see microcredit as a potential tool for moving welfare
recipients out of the system (Stoesz and Saunders 1999).
Some recent studies show that, if effectively run, microcredit programs can help
borrowers to improve their economic conditions significantly. For example, a
longitudinal study of 405 poor microentrepreneurs recently completed by the Aspen
Institute indicates that 72 percent experienced average household income gains of $8,484,
and more than 53 percent moved out of poverty in five years (Clark and Kays 1999). On
average, household assets grew by $15,909, while reliance on public assistance was
reduced by 61 percent. Other recently completed studies on projects sponsored by the
Corporation for Enterprise Development (Raheim, 1997) and ACCION (Himes and
Servon, 1998) also revealed positive impacts on borrowers.
Despite positive clients impacts reported in these studies, Schreiner (1998)
One must be cautious when trying to generalize the results of existing empirical
studies. This is not only because of the methodological issues raised by Schreiner
(1999a, 1999b), but also because most of the existing studies have been based on the
experiences of a small number of microcredit programs or programs of a specific type.
As pointed out by several scholars (Hung 1999; Johnson 1998; Servon 1997), microcredit
programs in the US differ considerably from one another in terms of missions, target
clients, and lending methodologies. Since microcredit programs differ from one another
in many aspects, problems and impacts associated with one type of program may not be
the same for another type. To assess fully the potential of microcredit as a tool for
microenterprise development, one must draw on the experiences of a larger set of
programs with diverse features. Currently, almost all empirical studies on microcredit are
based on a few non-random cases and often anecdotal evidence. Empirical studies that
examine a substantial number of programs of various types at the same time are needed
microenterprise programs occupy another distinct niche that is not being served by the
larger alternative credit programs. For example, most microcredit programs may not be
stand-alone programs, but part of a larger organization that seeks to encourage
microenterprise development through a wide variety of strategies, of which credit is only
one of many (Servon 1997, 1999). Further, microcredit is seen not only as a tool for local
economic development, but as a tool for personal empowerment of the underprivileged
(Johnson 1998). These potentially different missions may lead to very different types of
operational and management structures. Thus, in our survey, we first seek to examine
whether microcredit programs occupy a niche different from other alternative credit
programs that lend to small businesses, and whether there are major differences in
lending methodologies and other services provided by the two types of programs.
Second, we seek to assess the performance of microcredit programs. As
mentioned earlier, much uncertainty remains regarding the impacts of microcredit
Because of limited resources available for the research, we surveyed only
programs in California. California provides a fertile ground for this research because
programs in California serve a wide diversity of clients and businesses, in different social
and economic settings. Furthermore, as the most populous state and one of the most
diverse states in the US, California has the most microcredit programs. In the 1999
Directory of US Microenterprise Programs published by the Aspen Institute, 36 out of
the 341 surveyed programs are located in California. In comparison, New York, the state
with the second largest number of programs, has 21.
The survey was conducted in the Summer and Fall of 1998. To accomplish the
survey, we first compiled a list of possible alternative loan programs in California that
gave micro and small loans as part of their loan portfolio. This list of 87 programs was
compiled from various sources such as the 1996 Directory of US Microenterprise
Programs published by the Aspen Institute, The 1996-97 California Business Resource
than has been available in previous literature, it still suffers from selection bias as we
have no information on those programs that failed.
Each respondent was asked a series of questions to ascertain their funding
sources, client population, types of auxiliary services, operational features, and the
financial characteristics of their loan portfolios. The respondents were also asked to
assess the unmet needs of their programs.
Microloan vs. Other Alternative Loan Programs
Do microcredit programs occupy a distinct market niche and exhibit different
operational features from other alternative loan programs? As evidenced from the
results of our survey, the answer is a qualified yes. Tables 1 - 4 present the results
showing the differences and similarities in how the programs operate.
As evidenced in Table 1, the loans provided by the two types of programs differ
in size and terms. Although microcredit programs by definition provide smaller size
nearly three times as many loans in both the past year and overall, but these differences
are not statistically significant.
Despite these differences,
there were some striking similarities. Both types of
programs have close to 50 percent of their respective loan funds currently not in use.
Further, both types are slow to both provide an application to clients and fund successful
applicants. The total time for a successful application to receive their money is over two
months. Finally, the interest rate charged by both types is similar (11 percent vs. 9.4
percent), although the rates are statistically different from each other.
The programs are also similar in their reasons for loan denial (Table 2). While the
larger alternative loan programs are more likely to reject loans because of problems in
credit history or inadequate cash flow, the only loan management reason cited, which was
microcredit programs tend to offer more training and technical assistance and to involve
borrowers more intensively in the lending process. Substantially more microcredit
programs offer class-room type instruction and one-on-one counseling, and more of them
implement training for peer groups and group liability for repayment.2 Furthermore,
more microcredit programs draw on volunteers for providing training. This suggests that
most microloan programs are not stand-alone programs, but part of a larger organization
that seeks to encourage microenterprise development (Servon 1997, 1999).
Second, microcredit programs tend to be less formalized in their lending
operations (see Table 4). They are less likely to provide funding in phases, to take legal
action against default, and to sell loans in secondary markets. As pointed out by some
commentators, such informalities may have caused some microcredit programs to be at
risk for higher rates of default and loan losses, because they lack the administrative
capacities for evaluating applicants, keeping track of repayment records, and going after
types are similar in their limited outreach, levels of idle capital, loan processing time,
dependence on government funding, and reasons for denying loans.
IV. Outreach and Sustainability of Microcredit Programs
How do microcredit programs in our survey fare in terms of the two institutional
level performance criteria of outreach and sustainability? The results of our survey show
that their achievements have been quite limited.
A major appeal of microcredit in the Third World is its potential for serving large
numbers of low-income individuals who have limited access to the traditional banking
system (Otero and Rhyne 1994). Microcredit programs in the US, however, have much
smaller scale than many of the successful Third World initiatives.3 As evidenced in
Table 1, among the 16 California microcredit programs we surveyed, the average number
had utilized all of their funds, and the average loan fund utilization (measured by the ratio
of the average portfolio to the loan fund capitalization) was around 50 percent. In fact,
one program manager reported that despite having had a loan fund in place for three
years, the agency had not made a single loan. The manager cited three major reasons for
the lack of borrowers. First, many of its targeted clients, refugee immigrants, wanted
more than the program would loan. Second, many were able to obtain loans from friends
and relatives. Finally, many did not want to go through a thorough business planning
process in order to obtain a loan.
One of the reasons that the programs in our survey have less outreach than their
Third World counterparts is the differences in lending methodologies. In our survey,
only three out of 16 programs mentioned the use of group liability in their lending
operation. Some have suggested that the reason that US programs have shied away from
group lending is that many inner-city and low-income communities lack sufficient social
our survey are the most successful ones in California over the past 5 years because they
have not yet failed, yet they are all heavily dependent on external subsidies. Indeed, only
one percent of the overall funding for the programs is generated by “surpluses generated
from loan fees and interests” (Table 3).
Most Third World programs that attain high degrees of financial self-sufficiency
use decentralized branches to serve numerous borrowers and to involve them in various
loan-disbursement activities such as participant recruitment, and loan repayment tracking
and enforcement (Otero and Rhine, 1994; Morduch, 1999). These programs are able to
control the otherwise high administrative costs associated with making small loans. In
the US, most microcredit programs lack access to such reliable and free “help.” It is a
difficult task for these programs just to seek out potential borrowers, let alone involving
them in loan administration activities. In some programs, for instance, one or two loan
officers may be managing only a couple dozens of microloans per year.
Another reason for lack of financial sustainability is the unwillingness of
We also found that programs in the US are often faced with various constraints
that make it difficult for them to take advantage of operational features that have been
proven to be successful in the Third World. For example, as shown in Table 4, only a
few programs have adopted operational features identified by researchers to be key
ingredients for ensuring high repayment rates in Third World programs —progressive
lending, voluntary or compulsory savings, and bonuses for staff (Hulme and Mosley
1996; Morduch 1999).
Part of the reason that fewer programs in the US may have adopted these
operational features can be explained by their different circumstances. First, in many
developing countries, borrowing from a microcredit program may be the only means for
one to develop or maintain a business that provides for one’s livelihood. Losing one’s
eligibility for future loans may result in financial disaster. Progressive lending, in the
form of increasing credit limits for repeat borrowers in good standing, is a powerful
savings arrangements may be governed by various banking regulations that program
staff, who generally lack knowledge and background in banking and finance, are
reluctant to try.
Third, performance bonuses for staff are a key ingredient of an effective loan
collection system for successful Third World microcredit programs (Hulme and Mosley
1996). Such bonuses are rarely used by US programs, probably because high repayment
rates are usually not considered critical for their survival as most of their capital and
operational funds are derived from external subsidies. In addition, as the scale of most
US programs is very small compared with their Third World counterparts, performance
bonuses for staff are unlikely to be offset by additional returns generated by more
effective loan collection efforts.
V. Challenges Perceived by Program Staff
Category: Payday loans