Microfinancing the African-American Community: Utilizing Microloans to Revitalize Low-Income Communities Around the Country
Jordan Young
Saint Thomas Academy
Mendota Heights, MN
Microfinance is not a recent concept. Small microloan operations – initialized by the Irish Loan Fund system, the first official occurrence of microlending, which sought to improve living conditions for impoverished Irish citizens – have existed since the 1700s. In its modern form, microfinance became popular on a large scale in the 1970s.1 Giving out smaller low-interest loans, without collecting collateral, microfinancing institutions are able to reach a group of people that is often neglected by the loanable-funds market – African-Americans. The United States government – paired with the fifty state governments – should expand its funding for microloans as well as focus on creating tax credits and incentives for civilians, businesses, and non-profit organizations – such as CDFIs – to invest in impoverished communities – specifically those that are African-American dominant – in order to protect citizens who would otherwise lack monetary funding for community-based infrastructure development.
Supply and demand are central to the liberal meritocratic capitalistic economic system of the United States. As the supply-and-demand equilibrium is “set by the markets” in most cases, naturally, there are some people who are left out of the market simply because they cannot meet the equilibrium point monetarily.2 This is no different in the loanable funds market; as there are certain groups of people that find themselves excluded from the supply-and-demand-based loan-market participation. Often labeled as “high-risk” individuals, these inner-city applicants – often African-Americans – find themselves unable to receive funding in the form of investment from banks and other financial institutions for housing or businesses solely due to the fact that taking them on as a client would force the lender to incur too much risk relative to the reward of monetary gains from interest.
Another issue is that African-American applicants for loans are tremendously more unlikely to have family wealth to extract from. As such, African-Americans are more likely than whites to depend on microloans to start a business because fewer own their own homes or can tap into family wealth for assistance and are therefore unable to acquire loans from financial institutions or utilize family money to achieve their entrepreneurial endeavors.3 Additionally, many applicants are denied loans by banks and other financial institutions because they are seen as too risky and usually do not have collateral to be liquidated in the event of default. An apparent solution is to employ a system offering smaller, low-interest, loans, that do not take collateral or threaten seizure or liquidation in the event of default – enter microfinance.
Microfinance, microcredit, and microloans are central aspects of development around the globe. In a study by an ethnologist from the University of Akron, it was determined that the “best way to examine microlending is through long-term ethnographic research incorporating a livelihood studies framework.”4 A year-long study in rural Nicaragua explored, through the use of ethnographic livelihood studies, how the use of microloans and microfinancing were incorporated into the people's day-to-day economic decisions, and “how household economic strategies provided a contextualized understanding of the choices made by household members as they struggled to make ends meet.”5 The evidence illustrated that the prevalence of microloans increased throughout the study period and had a positive monetary and social impact on the Nicaraguan people, as displayed through their day-to-day economic decisions.6
“Beginning in the 1880s when the first minority-owned banks focused on low-income areas, community organizations have developed to provide needed financial services.” The predecessors to CDFIs – credit unions, community development corporations, and nonprofit loan funds – sought to better the conditions in these economically underserved markets under the principle that “successful community development requires community-based decision making.”7 This is the reason the CDFI Fund invests in Community Development Financial Institutions (CDFIs) to maximize impact in our nation’s low-income and impoverished areas. Utilizing unique programs and tailored resources that combined federal dollars with private investments, the CDFI Fund supports increased labor force participation and decreased unemployment, building businesses and infrastructure, and revitalizing neighborhoods.8 “Established by the Riegle Community Development and Regulatory Improvement Act of 1994, the CDFI Fund’s purpose is to promote economic revitalization and community development in low-income communities through investment in and assistance to CDFIs,”9 which will offer small loans, usually between $6000-15,000,10 that will allow communities to create small businesses and increase their self-dependency and infrastructure. This system not only benefits the community from a monetary standpoint but also carries with it positive externalities, such as increased happiness and independence which increase the social benefit of the arrangement.
The city of Atlanta, GA, for example, is setting aside $5 million to leverage a much larger infusion of capital for an inner-city lending authority. Of the additional capital needed to complete the city’s projects, some funds must come from residents in the form of stock purchases. Equity owners will consequently hold voting rights on the board as well as the rights to any profits that may amount. Another source of capital will most likely come as loans from the city of Atlanta itself, in an effort to improve the living conditions of its low-income communities. Yet another lender may be local commercial banks, which can “use the community bank to funnel money to the inner city as part of the obligations under the Community Reinvestment Act,”11 “which requires the Federal Reserve and other federal banking regulators to encourage financial institutions to help meet the credit needs of the communities in which they do business, including low- and moderate-income (LMI) neighborhoods.”12
Some might say: why not leave it to the private sector? One reason is that “inner-city businesses don't speak the language of commercial bankers.” Another point is that “money will be better spent when residents have their own money involved because monetary involvement revitalizes and connects a community.”13 Microfinancing will allow African-Americans to undergo the “catch up” effect and decrease the economic disparities that they face relative to other races, which will allow them to increase their human capital and physical capital – by means of education and infrastructure – and propel into the future.
References and Endnotes
1 Kagan, Julia. “Microfinance Definition.” Investopedia, Investopedia, 24 Mar. 2021, www.investopedia.com/terms/m/microfinance.asp#:~:text=History%20of%20Microfinance,-Microfinance%20is%20not&text=In%20its%20modern%20form%2C%20microfinancing,by%20Muhammad%20Yunus%20in%20Bangladesh.
2 Milanovic, Branko. “2. Liberal Meritocratic Capitalism.” De Gruyter, Harvard University Press, 24 Sept. 2019. www.degruyter.com/document/doi/10.4159/9780674242852-002/html.
3 Gunther, Marc. “Bridging the Racial Wealth Gap With Loans.” Chronicle of Philanthropy, vol. 33, no. 3, Jan. 2021, pp. 16–18. EBSCOhost, search.ebscohost.com/login.aspx?direct=true&db=aph&AN=148129194&site=ehost-live.
4 Kurlanska, Courtney. “Ethnographic Livelihood Studies: The Minutiae of Microloans.” Ethnology, vol. 50, no. 2, Spring 2011, pp. 95–115. EBSCOhost, search.ebscohost.com/login.aspx?direct=true&db=aph&AN=87333754&site=ehost-live .
5 Gao, Tian, and Bruce Gurd. “Organizational Issues for the Lean Success in China: Exploring a Change Strategy for Lean Success.” BMC Health Services Research, vol. 19, no. 1, Jan. 2019, pp. 1–11. EBSCOhost, doi:10.1186/s12913-019-3907-6.
6 Gao, Tian, and Bruce Gurd. “Hospital Size.” Chart. BMC Health Services Research, vol. 19, no. 1, Jan. 2019, p. 6. EBSCOhost, doi:10.1186/s12913-019-3907-6.
7 “Home: Community Development Financial Institutions Fund.” Home | Community Development Financial Institutions Fund, www.cdfifund.gov/.
8 “Community Development Financial Institutions Fund.” https://www.cdfifund.gov/sites/cdfi/files/documents/cdfi_7374_infographics_final.pdf.
9 “Community Development Financial Institutions Fund.” https://www.cdfifund.gov/sites/cdfi/files/documents/cdfi_infographic_v08a.pdf.
10 Nav. “Microloans: What Are They & Who Are They For?” Nav, 26 Jan. 2021, www.nav.com/business-financing-options/microloans/.
11 Passell, Peter. “Economic Scene; Banking Help for Inner Cities: Not Needed, Its Critics Say.” The New York Times, The New York Times, 25 July 1996, www.nytimes.com/1996/07/25/business/economic-scene-banking-help-for-inner-cities-not-needed-its-critics-say.html.
12 Board of Governors of the Federal Reserve System, www.federalreserve.gov/consumerscommunities/cra_about.htm.
13 Passell, Peter. “Economic Scene; Banking Help for Inner Cities: Not Needed, Its Critics Say.” The New York Times, The New York Times, 25 July 1996, www.nytimes.com/1996/07/25/business/economic-scene-banking-help-for-inner-cities-not-needed-its-critics-say.html.