The Green Sheet Online Edition

July 11, 2011 • Issue 11:07:01

Microfinance and profits

By Patti Murphy
ProScribes Inc.

Editor's Note: "Microfinance and profits" were published by InsideMicrofinance.com June 15 and 20, 2011, respectively; reprinted with permission. © 2011 InsideMicrofinance.com. All rights reserved.

As the business of microfinance has matured in the United States, two distinct business models have emerged. One targets the ultra-poor: inhabitants of the 9 million American households identified by the Federal Deposit Insurance Corp. as unbanked, and at least some of those living in 21 million other households the FDIC deems to be underbanked.

Another engages individuals - many of whom are micro-entrepreneurs who have been squeezed out of traditional borrowing markets by tightened credit standards. Some are underbanked and have thin credit files. Many are from immigrant families. Also included are increasing numbers of tradesmen and others among the recently unemployed. Serving this latter market are financial services companies that offer the accessibility of check cashing facilities combined with the savvy of 21st century banks - companies like Progreso Financiero, OUR Microlending, Prosper.com, and even Sam's Club, the warehouse chain owned by the mega-retailer Wal-Mart Stores Inc.

The FIELD program at the Aspen Institute studied this trend and produced A Newly Crowded Marketplace: How For-profit Lenders are Serving Microentrepreneurs, a report that examines this trend, the pros and cons of different business models employed, and broader market implications. It also provides a look inside the operations of leading for-profit micro-lenders.

A few highlights of the report follow:

• Nearly two out of three lenders surveyed following the first quarter 2010 reported increased loan demand.
• Just 39 percent reported increased loan originations during the same period.
• "Old school" nonbank lenders - such as merchant cash advance, factoring and purchase order factoring - also saw an uptick in business.
• For the most part, loan pricing is markedly higher than at not-for-profit MFIs.
• Many for-profit providers offer an array of financial services and educational services.

Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.

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