Academic journal article Journal of Corporation Law

Increasing Microlending Potential in the United States through a Strategic Approach to Regulatory Reform

Academic journal article Journal of Corporation Law

Increasing Microlending Potential in the United States through a Strategic Approach to Regulatory Reform

Article excerpt

  I. INTRODUCTION
 II. BACKGROUND
     A. A Brief History of Microcredit and Its Success in Developing
        Countries
        1. Functions and Effects of International Microlending
        2. Microlending's History and Successes
        3. Microlending and the Market
     B. Background on Microcredit in the United States
        1. History and Overview of Microlending in the United States
        2. Microentrepreneurs and the Need for Microcredit in the
           United States
        3. Regulation of Microcredit in the United States
     C. Differences Between U.S. and International Microcredit
        Markets
        1. Logistical Limitations
        2. Theoretical Limitations
III. ANALYSIS
     A. Current Regulations Affecting Microlending
        1. The Community Reinvestment Act
        2. Interest Rate Regulations
        3. Capital Holding Requirements
 IV. RECOMMENDATIONS
     A. Promising Regulatory Reforms to U.S. Microlending
        1. Exempt Microlenders from Interest Rate Caps
        2. Amend Minimum Capital Holding Requirements to Accommodate
           the Higher Risks Involved in Microlending
        3. Adopt Microlending Methods Consistent with the Realities
           of the U.S. Market
     B. How Microlending Reformers Can Most Effectively Enact the
        Desired Reforms
        1. Presenting Microlending in a Market Context
        2. Presenting Microlending as a Way to Lessen Reliance on
           Governmental Assistance
  V. CONCLUSION.

I. INTRODUCTION

After 30 years of lending money to poor people in developing countries to encourage entrepreneurship, microfinance institutions (MFIs) have become generally accepted in the international community. (1) The United Nations named 2005 the International Year of Microcredit. (2) President Bill Clinton sang its praises. (3) Microlending has appealed to both liberals and conservatives in U.S. government. (4) Muhammad Yunus, and the Grameen Bank he founded, were recently given a Nobel Peace Prize, and Business Week named Yunus one of "The Greatest Entrepreneurs of All Time." (5) Many international MFIs have become self-sufficient and enjoy repayment rates in the high 90 percentages. (6) Microloans have supplied billions of dollars in small loans to millions of people struggling to start and expand businesseS. (7) Despite this international success, microcredit efforts in the United States are nowhere near self-sufficient, face high default rates, and are not meeting microentrepreneurs' needs.

This Note explains microlending in general, and then examines its implementation in the United States. It then analyzes why U.S. MFIs have not reached self-sufficiency at the same levels as international MFIs. Next, this Note examines the various proposals different scholars and practitioners have offered to address the limitations of microcredit in the United States. This Note next recommends the most promising solutions, which center on regulatory reform. The proposed regulatory reforms aim to strengthen the sustainability of microlending in the United States. The Note then offers a practical political strategy to implement these reforms--something largely missing from academic literature on microlending in the United States.

II. BACKGROUND

This Part explores the history of microcredit, both abroad and in the United States. It then explains U.S. microlending in more detail, and outlines the demand for more sustainable microlending practices in the United States. Finally, this Part explores the U.S. regulations that most directly affect microlending practices.

A. A Brief History of Microcredit and Its Success in Developing Countries

Since their inception in the 1970s, MFIs have offered economic opportunities to poor people, in part by lending small amounts of capital to borrowers who use it to fund their small businesses. (8) MFIs generally lend to microbusinesses, which are businesses with five or fewer employees. …

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