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"Microcredit for Americans" - Is it all about the Score?

by Jonathan Morduch of the Financial Access Initiative

Buried at the bottom of Shaila Dewan's recent New York Times article on "Microcredit for Americans" is an idea that deserves much more attention:

"Grameen helps its clients in another way that many experts say is more important than increasing income — it establishes good credit scores. Many poverty alleviation groups have shifted their focus from saving to credit building, because people with poor or no credit must leave large deposits for basic needs like utilities, have trouble renting decent housing, pay much higher interest rates and have a harder time finding jobs.
Nayrobi Gonzalez de Quiroz, 26, recently received her first Grameen loan but decided not to follow through with her plan to buy handbags for resale. After using about $200 to pay off a debt, she said, she decided it was safer to leave the money in the bank and make the payments from her earnings as a manicurist.
'Here, you have to have good credit,' she said. 'I have a young son and I have to think about his future.'"

The choice by Nayrobi Gonzalez de Quiroz to not put her money in a business is familiar from other studies of how people use microcredit around the world, so it's not surprising to see it in the U.S. The more surprising idea is that microcredit may matter not because of anything having to do with any given loan and the possible returns on investment. The path of impact could run through impacts on credit scores. This is a phenomenon that is particular to the U.S. and other places where credit scores are part of the backbone of retail banking. One impact comes through the way that a better credit score makes access to banks easier, but credit scores are also used by employers in making hiring decisions, and landlords in making housing decisions. Having a better credit score is a big deal.

Photo credit:   Ruth Fremson for  The New York Times

Photo credit:  Ruth Fremson for The New York Times

It also means that the real win for microcredit is for their customers to move on to commercial banks. That kind of "graduation" into traditional, commercial finance was once a big hope for microcredit globally, but it got slowed down as microcredit institutions realized that they would take a big hit if their customers started graduating in big numbers. Most importantly, it would mean that the microcredit institutions would lose many of their most profitable customers -- those with the best track records, borrowing at the biggest scales. Microcredit institutions thus moved into high gear trying to develop products and processes that would allow them to hold onto their most established customers.

I'm in London this week at the Financial Inclusion 2020 conference, and have had some good discussions with Gina Harman of Accion USA. Any news report that really wants to describe what's going on with "microcredit in America" would do well to pay attention to Accion too.