Margaret A. Johnson
Oklahoma State University
Stillwater, OK 74078-4062
This paper examines the impact and effectiveness of microcredit on new business formation in the United States. In addition to two case studies of microcredit organizations, general issues regarding the effectiveness of microcredit organizations in the United States are discussed. Microcredit organizations are nonprofit organizations that make "micro" ($500 to $25,000) business loans to individuals with "micro" businesses (1 to 5 employees, usually sole-proprietorships). Most microcredit organizations make loans to individuals, but some offer a form of group lending or rotating credit. To date, research on microcredit organizations has focused primarily on those offering group lending. In contrast, the two case studies presented here are organizations that offer only individual lending.
To define the general issues related to microcredit in the United States, an analytical comparison is made of the differences between microcredit in the United States versus less developed countries and a comparison of self-employment strategies of immigrants versus disadvantaged populations in the United States. This comparison defines the parameters of the case studies. The preliminary results presented here are from in-depth interviews with program directors about topics such as the scope of their programs, characteristics of clients, number of businesses started/expanded, and strengths and weaknesses. One key issue is how to measure effectiveness. Part of the rhetoric and intent behind microcredit has been economic empowerment of disadvantaged populations, with new business formation viewed as a way to achieve that end. Thus, the primary goal has not necessarily been business creation. The diverse goals of microcredit organizations need are considered when evaluating impact and effectiveness.
Microcredit organizations were started in the United States after their perceived success in less developed countries. However, a direct transfer of organizational form has been difficult because of differences in regulatory, economic and competitive environments. For example, the "minimalist" approach for microcredit organizations in less developed countries has been hailed as the most successful, but some microcredit organizations in the United States that started out with the minimalist approach found that they needed to add additional training and support services to increase the likelihood of clients' success. The two organizations from this study provide micro loans to individuals and collaborate with other organizations to provide training. Their clients tend to be of low to moderate income with few clients at the poverty level. The organizations tend to view microcredit as an important and unique service that they provide to clients rather than as a new policy technique to economically empower disadvantaged populations.
The limited research currently available seems to indicate that (1) "minimalist" organizations that provide individual lending without support services tend to serve low to moderate income clients and not the most economically disadvantaged; and (2) "comprehensive" organizations offering group lending with support services tend to have a high cost per dollar loaned ratio. We need comprehensive research to know whether or not these statements hold up when a representative sample of the field is evaluated. The two case studies of organizations that offer individual lending combined with earlier case studies of organizations that provide group lending indicate the diversity of microcredit. Hence, it might prove useful to conceive of microcredit in the United States as existing on a continuum from minimalist to comprehensive organizations with characteristics of clients, cost of programs, and organizational goals correlating with type of organization.