Microfinance in… California?

Evelyn Huang leads the Small Business Loan Program at Opportunity Fund, an organization which also provides matched savings accounts, finances affordable housing in Silicon Valley, and lends to real estate projects bringing investment in to low-income communities. Opportunity Fund is also one of the hosts of the Microfinance California 2009 conference, on May 28, 2009.

Kirsten Weiss: Tell me a bit about Opportunity Fund’s microloan program in California.

Evelyn Huang: Microfinance in the Bay Area is targeted towards working people – hard work isn’t always enough to build a solid economic foundation. For example, a single parent with two kids in the bay area needs around $65,000 per year to get by, but a minimum wage earner won’t earn that. Opportunity Fund focuses on individual families, businesses, and communities with the goal of building a financial system. We see microfinance as a comprehensive approach to financial education, savings, business loans, and investment in communities and homes. At Opportunity Fund, we provide Individual Development Accounts (IDAs) targeted toward working families, combined with financial education and matching funds they can save and use for education, retirement, citizenship, etc. We also provide small business loans – lending to support entrepreneurs who don’t qualify for commercial business loans but need and can use capital. Finally we provide community real estate lending, financing non-profit developers to build affordable rental and for-sale housing complexes and also things like community facilities, like child care centers, etc.

Kirsten Weiss: What are the loan sizes within your microfinance program?

Evelyn Huang: The loans range from $1,000 to $200,000. However, 90% of our loans fall within the $1,000-10,000 range.

Kirsten Weiss: How does microfinance in the US differ from microfinance in developing countries?

Evelyn Huang: There are two general microfinance issues that are really different: the environment and the business model. On the environmental side, the cost of living is very different in California than in many international arenas. Starting a business in California takes a lot more up-front capital, there are frequently more rules and regulations, and the dollar amount required for loans is higher. For example, $200 won’t do much for someone running a business in California. There’s also more critical competition for the microlender. People can come to this country with no credit history or financial education and they will receive credit card offers in the mail. With that type of credit availability, makes the US a much more competitive environment for microlenders. The last environmental issue has to do with the concentration of borrowers. In a lot of microfinance, potential borrowers are highly concentrated, lending microfinance to the village-based model. However, in the US, borrowers are more widely distributed across geography, industry, and loan size needed, which means that our business model as an organization has to be different. As to our business model, here in the US we not only provide capital but also training resources. We meet with clients one-on-one and provide business and credit advice. Given the lack of concentration of borrowers, we have higher marketing and advertising costs. In general, the interest rates we charge will also be a lot lower than those in the microfinance industry internationally. I don’t think domestic microfinance can be a profitable business; it has to be subsidized.

Kirsten Weiss: How is the current economic downturn affecting microfinance in the US?

Evelyn Huang: We’re seeing more demand for microfinance throughout the spectrum of clients. On the higher end, we’ve had applicants with good credit scores and who potentially could have been served by a bank in the past, but can’t get a commercial loan today. Since 2008, we’ve found the percentage of clients with credit scores over 700 – which is quite good – has doubled. On the bottom half we’re seeing applicants in worse financial shape in general. Examining all the applicants that came to our program, we’ve seen increases in clients with tax liens and judgments against them. The mortgage market has also affected clients like ours. The percentage of clients who actually owned a home increased from 17 to 24% – small numbers, but this is an expensive place to live. If you’re a low-income person in our program you’re probably over-indebted if you own a home. The average mortgage outstanding has increased from $260,000 two years ago to $445,000. Homeownership can be an asset but a lot of low income clients are severely over-leveraged. These are the people who hold subprime loans that convert to higher interest rates and unmanageable payments. We see a lot more of these instances in this crisis. In part we’re responding to that by pushing a lot more education. A lot of the clients that call us, if they’re in poor financial circumstances, we’ll try to talk them through as much as we can as well as refer them to other agencies which might have more in-depth knowledge, e.g. to legal counseling on mortgage issues. As to how the environment’s changing and how it’s affecting us as a microfinance institution, it’s harder to make new loans. I think part of that is the amount of risk that we can take. Our delinquency rate is going up because people are having a tougher time. The clients to whom we’ve made loans are losing their jobs; these are typically wage earners and the first to be let go, and they’re highly dependent on their income to cover their expenses. I think the total number of loans we’ll do in this fiscal year will probably drop 15% because clients are in more difficult financial situations and in order to protect our financial health as an organization. On the positive side, the clients that we have worked with – our existing clients that have gone through our business consulting – are in general well prepared. We did a survey of our existing borrowers, asking how their businesses are doing and how the crisis is impacting their personal financial situation. Forty percent of the respondents reported their businesses were experiencing some kind of difficulty. But the vast majority of the clients also said that they did not expect to experience any change in their personal financial situation. They felt they had the tools and knowledge to weather the storm. Our clients are making intelligent decisions. One client told me, “it’s a difficult time but I understand when this happens that I need to cancel my cable and lower the number of minutes on my cell phone.” So they know what they need to do to manage their personal finances during this downturn.

Kirsten Weiss: Is there anything else you’d like to add?

Evelyn Huang: I’d like to let people know about the Microfinance California 2009 conference, at Stanford University in Palo Alto on May 28th. It’s the first state-wide conference on microfinance in California, where participants can learn more about microfinance, visit Bay Area microfinance borrowers, and meet with practitioners, leaders, and investors. You can learn more about it at: http://www.microfinancecalifornia.org/home/

About Kirsten Weiss

Integrating marketing and strategy to develop profitable, demand-driven institutions.