Microfinancing Represents an Exciting and Lucrative New Market Opportunity for Credit Unions

By Bob Davis

It is a universal truth: Old-fashioned loans are hard to come in these economic times. For those below the poverty line, this is especially true, as it can be a task even to keep up with payments, much less drive profit for the lender. This is why microcredit, the smallest variety of loans with low principal and an attractive interest rate for all parties, represents such a great opportunity for credit unions and their members.

What is a microloan?

A microloan is typically defined as less than $50,000. Established in Bangladesh by Grameen Bank to ease the debt of rural villagers, the trend has been on the rise in the United States since the beginning of the financial crisis. They are designed to help those ineligible for a regular bank loan or credit card “unlock their inner entrepreneur,” as Shaila Dewan writes in the New York Times.  The Aspen Institute and Grameen America have reported more than tripling their borrowers from 2008 to 2011, and that most borrowers not only repay their debt, but they also return for more.

[Image Source: New York Times]

[Image Source: New York Times]

 Why are they so popular?

In a time when financial stability is impossible to attain for many below the poverty line on minimum wage and part-time jobs, workers are deciding to start their own businesses and take control of their income and quality of life.  Microcredit offers a previously inaccessible opportunity for small business startups and economic growth.

Moreover, nonprofit microlenders usually offer financial literacy training or hold training sessions to strengthen the capability of borrowers to use microcredit responsibly and effectively. The Opportunity Finance Network, for instance, holds webinars and events across the country to create innovative business models, develop new products and find effective ways to take advantage of technology for borrowers. Grameen America even has branches in New York City, Los Angeles, Omaha, Charlotte, North Carolina, and the San Francisco Bay Area.

How does it work?

A group of borrowers, typically five, mutually approve each other’s loans and pay weekly at a 15-percent annual interest rate. Each year, the amount of money available for these loans increases as long as payments are on time. These loans offer less hassle to customers, often requiring much less background information, and some do not even require proof of legal residence. Borrower group members are often below the poverty line, but microlending clearly allows the to take advantage of new opportunities to rise above it and achieve their financial, vocational and lifestyle goals.

What does this mean for Credit Unions?

Microlending represents a huge opportunity for Credit Unions to minimize risk and maximize reward by expanding the breadth of their long-term clientele.  While little data is available to support whether or not microloans are pushing people over the poverty line, so many individuals and families in this country would benefit just by knowing about such opportunities.

Microcredit offers a skill set and passes healthy financial habits along to Generation Y along the way. In an age when many have yet to discover the benefits of credit unions over banks, microlending can help establish lifelong member relationships for credit unions while giving people opportunities for financial well-being that they couldn’t access previously.

Other non-traditional lending practices

I learned recently that at least one credit union is using additional non-traditional lending options, making loans available through dentists, plastic surgeons and even auto body repair shops. With all of these tactics, credit unions can make small loans and attract new members through the process.

At Robert C. Davis and Associates, we can help maintain your level of customer satisfaction with a growing base of customers. Our exclusive Quality Conversation model can create primary relationship conversions with potential and existing customers by effectively communicating the importance of opportunities such as microcredit and other non-traditional ways of borrowing. We train and coach employees in such a way that fosters a culture change that will help make your credit union a primary financial institution for these potential new members. With the high rate of returning borrowers already being seen in this market, your credit union can only benefit from the exposure.

For a free consultation on reaching and winning these potential members to your credit union, contact me at bob@robertcdavis.net or 678-548-1775.