Since its inception in the 1970s, microlending has proved a phenomenally successful way to empower individuals and help eradicate poverty...

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Since its inception in the 1970s, microlending has proved a phenomenally successful way to empower individuals and help eradicate poverty. The poster child is usually a poor woman from some far-off place — maybe a Guatemalan seamstress who uses a $50 loan to buy her own sewing machine, grow her business and break free from impoverishment.

Rarely does the person in need look like Laura Matson, a white, college-educated woman living in the U.S., the world capital of easy credit and up-by-the-bootstrap capitalism.

In 2001, Matson quit her $50,000-a-year job as an event organizer to care for a brother on kidney dialysis. To ease the financial burden, she started peddling homemade silk shibori and batik scarves to passers-by in the Pike Place Market.

The numbers didn’t add up, however. With bills mounting and unable to obtain a loan, she maxed out her credit cards and began sinking in debt.

“I didn’t grow up in poverty; I woke up in it,” says Matson.

Then she found Washington CASH, a nonprofit microlender in Seattle since 1995. Her business was one of 20 selected from 60 applications for assistance. After nine training sessions, in which she researched and wrote a business plan, Matson received a $500 loan.

Washington CASH

What is it?: Seattle-based, not-for-profit microlender in the Central District.

What does it do?: Provide small loans, ranging from $500 to $35,000, and technical assistance to low-income business owners.

How much money has it loaned?: Since 1995, 267 loans totaling more than $580,000.

How to reach it: 1912 E. Madison Street, (206) 352-1945

Source: Seattle Times

Four years later, Laura Matson Designs scarves fetch as much as $300 at several Northwest boutiques, and Matson travels around the country selling her scarves at major crafts fairs, such as Spring Crafts Park Avenue in New York. She says she sold $5,000 worth of merchandise at that show and was voted one of the top 50 vendors. Next year, she hopes to market her products to retail chains.

Microlending in the U.S. is also undergoing a major growth spurt. Almost nonexistent a decade ago, 517 organizations, including 10 in Washington, lent $100 million to $150 million to 626,277 low-income entrepreneurs last year, according to estimates by the Association for Enterprise Opportunity, a trade group.

Most beneficiaries are women and minorities, and increasingly immigrants, ex-cons and people with disabilities — groups historically shut out or too wary of traditional financial services. Most are on public assistance or working two jobs to make ends meet.

To be eligible for assistance from Washington CASH, income cannot exceed twice the poverty threshold, about $19,000 annually for an individual or $25,000 for a two-person household.

Nationwide, the number of potential microborrowers — low-income individuals outside the financial system — is estimated at 13 million to 19 million, a market larger in size than more than half the world’s countries.

“This isn’t something just happening overseas,” says Melany Brown, executive director of Washington CASH, which in November received a three-year, $485,000 operational grant from the Department of Health and Human Services. “What middle-class America doesn’t realize is that not everyone is being bombarded with credit-card offers under the doormat,” he said.

The U.S. market for microlending is still in its infancy.

Small dollars, big difference

What is microlending? Small loans to impoverished individuals marginalized by the traditional financial system so they can start or grow businesses.

Why is it necessary? In Africa, 80 percent of the labor force works outside of the formal economy. In Latin America, it’s 55 percent. In the absence of a social safety net, credit allows people to work for themselves to try to lift themselves out of poverty.

Who receives the loans? An estimated 3,100 microlenders provide assistance to 92 million people worldwide, 83.5 percent of whom are women.

Does it exist in the U.S.? Yes. 517 organizations lent $100 million to $150 million to 626,277 individuals in 2004.

Is it successful in the U.S.? Maybe. About 57 percent of businesses make it into their fifth year — 10 percent more than small businesses that do not receive the support of a microlending organization. But most microlenders operate with huge deficits and cover costs only through grants and donations, not lending activity, like their counterparts abroad.

Source: Microcredit Summit Campaign, Association for Enterprise Opportunity and The Seattle Times

Boston-based Acción USA, the country’s biggest microlender, has disbursed 25,000 loans totaling $140 million since 1994. Internationally, Acción and its partners have made $7.6 billion in loans to 4.7 million borrowers in 22 countries since 1992.

One reason for the disparity is greater need abroad. Global Partnerships, a Seattle-based microlender, says income per capita in the four Central American countries it operates in is less than $1,000 a year compared with $31,000 in the U.S.

Despite the gap, an innate entrepreneurial culture born from the developing world’s mammoth sell-or-starve informal economy has allowed microlending to flourish, even while it struggles in the U.S.

At 7.1 percent, Acción’s write-off rate for bad loans in the U.S. is more than double what it is abroad. The poorer loan performance is attributable in part to usury laws that in many states cap interest rates at levels well below the 60 percent charged in other markets.

As a result, institutions like Washington CASH, whose loans carry rates ranging from 8 to 12 percent, rely on private donations or grants to cover more than half of their costs.

The cost of doing business, plus operating costs for microlenders, is also higher in the U.S.

“By the time someone applies for a loan in the developing world, they already have substantial business experience — all they need is capital to grow their business,” says Bill Burrus, chief executive of Acción USA.

“In the U.S., borrowers often have no business experience,” he said, “so organizations need to devote huge resources to training so they can navigate all the red tape and satisfy expectation for better quality products.”