United States Microfinance: Regulating to Promote Growth?

This study draws on 20 in-depth interviews with microfinance institutions, practitioners, analysts/policymakers, and academics, along with a review of literature to understand and assess the state of the microfinance industry in the United States in terms of its salient features, critical issues and regulatory landscape, using the microfinance chain of funders, providers and customers as an organizing framework. Global microfinance is used as a baseline comparison where relevant. The study finds that the microfinance industry (MFI) in the United States is very much in a nascent microcredit stage, populated with microfinance institutions that are largely nonprofit, non-depository, credit only institutions, with some of the larger MFIs forming symbiotic partnerships with commercial banks in order to overcome the banking challenge. Their target market, funding sources and governance issues that stem from the MFIs’ existence at the nexus of banking and development are discussed. The current state of microfinance regulation in the United States is assessed in light of the costs and benefits of regulation as well as its unintended consequences. We suggest a tiered/gradual growth promoting regulatory approach that would allow an MFI to transform gradually to offer more comprehensive services, while making allowances for the industry’s developmental state.