The microfinance-subprime myth and is p2p lending for US small business?

The Wall Street Journal asserts that “many of the problems in Indian microlending might sound familiar to students of the US mortgage crisis” leading The Economist to ask: "Are microfinance loans the new subprime mortgages?"

In this disappointing take on the microfinance industry (the magazine refers to the reputable Accion International as a "global network of microfinance schemes"), one crucial differentiating factor (among many) between microfinance and subprime is neglected. In the subprime market bankers were reliant upon asset speculation -- real estate -- that caused them to essentially ignore borrowers' ability to repay. There is no such underlying asset blubble in microfinance.

I'm also intrigued by comments made by Beth Rhyne, Director of the Center for Financial Inclusion at ACCION, in a talk for her book Microfinance for Bankers and Investors that I heard last week:

"Banks are not necessarily the key movers. The real game changers are retailers, telecoms companies and others with new and stronger connections to the underserved, low-income market. And technology companies that bring in lower cost business models, like VISA’s government-benefit distribution programs."

This ability to deliver financial services without banks is an important innovation in the developing world and one with interesting parallels to peer-to-peer banking in the United States, another innovation that cuts out the bank. Later in her talk, Rhyne suggested that p2p lending will not take off in the United States for small entrepreneurs because here the barrier to entry of starting a small business is so high that most people who pass that barrier can also qualify for a loan from a bank. The evidence may be there to support that; from what I can see, most borrowers on American p2p lending sites are seeking loans to consolidate credit card debt rather than begin/expand a small business. Looking at Lending Club borrowers, only about 15 of the 91 notes currently available relate to small business demands.

I'd be interested to know what the players in the p2p lending space think of Rhyne's assertion.

Flickr credit: Meanest Indian

Comments

[agard]

Hi Melody,

Thank you for this post! I agree on all fronts. Microfinance and sub-prime lending are very different. In addition to your point on asset speculation and the lack of this in microfinance, there is also the truth that sub-prime lending is what it is because here we have ways to determine who is a higher-risk borrower. But poor does not equal high risk. Microfinance is finding ways to evaluate risk without the presence of credit bureus and it is doing this to avoid over-indebting poor clients who may be higher-risk borrowers.

In the US, most who can make productive use of a loan are able to borrow. The only group that seems excluded might be immigrants as they lack credit scores and cannot borrow easily or affordably from traditional banks. Domestic microfinance seems to do well in serving this segment. I wonder how and if P2P sites are reaching immigrants, and whether this might provide another good alternative for accessing credit?

[Susan]

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Susan

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