Why Loans Won't Save the Poor

Two labor and urban affairs experts explain why microlending programs don't solve all the problems of the disadvantaged.

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It's fashionable to say that microlending programs solve the problems of the disadvantaged. Too bad it's almost never true

The myth that small-business ownership is a viable route to upward mobility for all who work hard and live frugally circulates powerfully in American culture. In policymaking circles the belief is taken one step further: microenterprise-loan programs are touted as the solution to urban poverty. The programs typically provide self-employment training and small amounts of credit to groups that are underrepresented in the small-business universe: for example, 41% of U.S. programs target women, and 38% target a specific racial or ethnic group. Microenterprise assistance has proliferated in the past decade, and more than 200 programs are now active in the United States. Are they successful? The answer depends on what you mean by success and on whom you ask. Policymakers and the media have bought into the idea that small loans to poor minorities can serve as bootstraps: the ghetto dweller can open a small business and achieve affluence, creating jobs for other inner-city residents in the process.

While it is true that microenterprise loans do create jobs, the loans aren't large enough, nor are there enough of them, to revitalize poor communities. Early expectations of what those programs could accomplish were based on their success in developing countries. Unfortunately, evaluations driven by organizations that fund such programs have not tracked the programs' adaptation to the U.S. context, and wishful thinking among funding sources and policymakers eager to discover the silver bullet for the urban-poverty problem often overshadows objective analysis.

Take Working Capital, an extremely active microenterprise program in Cambridge, Mass., that was created in 1990. According to executive director Jeffrey Ashe, Working Capital targets "low-income communities to rebuild local economies." As of November 1995, Working Capital had made more than 227 loans in its metro Boston project, an impressive accomplishment. But what lies behind those numbers?

A 1994 analysis of Working Capital's metro Boston loan portfolio revealed that the average loan size was $659, hardly large enough to finance the type of businesses that could generate many employment opportunities for a significant number of unemployed inner-city dwellers. In addition, 71% of the loan recipients had some college education; only 5% did not have a high school diploma. The median income of borrowers was $28,500; only 16% of the borrowers had a personal income below $15,000, and 48% were earning $30,000 or more. Policymakers and fund providers who expected to create many businesses among people with very low income are often disappointed when they hear such statistics. But the fact is, as microenterprise-program managers will attest, most low-income, would-be entrepreneurs need more than access to credit to exit poverty. Running a small business in this country requires an education and a dependable support network as well.

Miriam Walden formerly managed and now assists with the small-business loan fund for the San Francisco-based Women's Initiative for Self Employment (WISE), one of the first microenterprise programs in the United States. Walden believes that the typical microenterprise-loan recipient at WISE has little ability to generate jobs. "If what you want is economic development, you've picked the wrong horse to ride," she says. The potential of microenterprises to alleviate poverty, in Walden's opinion, is similarly weak: "Many of the businesses started here don't fully support families." The virtue of a microenterprise, rather, is that it helps a family patch together a package of income from multiple sources. "People have combinations of traditional jobs and self-employment," says Walden. "When you put everything together, that's a plus, because the object is to increase incomes and to help families."

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