Microfinance plays a small but crucial role in the United States’ economy as the only financing option available for low-income entrepreneurs, according to a new study from the Tippie College of Business.

Anne Villamil, professor of economics, said that access to credit is key for low- and moderate-income people who want to start a business. But according to the FDIC, 18% of low-income households, or 24 million, lack that access. 

For those 24 million, VIllamil says microlending can fill the gap. While normally associated with developing economies, microfinance has taken hold in the United States in recent years. The dozens of lenders range from the U.S. office of Nobel Prize-winner Muhammad Yunus’ Grameen Bank to crowdfunding sites like Kiva, as well as organizations that focus on lending to entrepreneurs who are women or from certain ethnic groups or geographical regions.

Most lenders receive their funding from grants from government agencies, social service organizations, or individual contributions. Depending on the organization, loans can range from as little as $25 to $500,000.

The exact size of the industry is not known, but Villamil said it’s so small it makes little impact on the $29 trillion U.S. economy. But for loan recipients, she said the impact can be enormous, as borrowers tend to be minorities, recent immigrants, women, or others who are otherwise excluded from the financial system because of low income.

Using data from the U.S. Microenterprise Census and the Accion U.S. Network, the largest nonprofit microfinance institution in the U.S., her study found microlending makes several meaningful impacts:

--Lending helps low-income people generate income by providing the opportunity to start or expand a small business. 

--It’s a front door for underserved populations to formal financial systems, helping them build credit histories and eventually access larger loans, insurance, or savings products. 

--By offering lower interest rates than informal lenders, microlending can reduce reliance on exploitative loans. 

--From a social benefits perspective, clients of lending programs often reinvest earnings in their families, especially children’s education, health, and nutrition. By providing resources to disadvantaged groups, microlending can help break cycles of poverty and exclusion.

The study found this does come with some drawbacks for loan recipients, mainly in the form of higher wages for employees, and it also slightly reduces credit available for larger firms.

But she said the impact is so significant on individual loan recipients that public policy should encourage microfinance. 

Villamil’s study, “Microfinance in the U.S.,” was published in the journal Economic Theory. 

Media contact: Tom Snee, 319-384-0010 (o); 319-541-8434 (c); tom-snee@uiowa.edu