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Microfinance and the U.S. Racial Wealth Gap

Updated: Mar 8, 2023



The racial wealth gap is the foremost issue concerning the US currently and there is a controversial discussion in the political realm about the way to converge this disparity, whether that be through reparations, affirmative action measures, or other redistributive policies. It seems that combatting income inequality rather than trying to level out overall wealth would be the most accepted and feasible strategy. In this effort to converge incomes, the most pragmatic approach may be an increase in microfinance. In this explainer, I will display how microfinance could serve as a productive solution to the racial wealth gap.


Overview of the Racial Wealth Gap:


There are prodigious differences in the likelihood of white and black households to have access to very helpful financial services for building wealth, such as credit cards and lines of credit in a bank. Even at the same income range of $50,000-$75,000, 81% of white households had access to these financial services, while just 64% of black households did. In general, Black Americans are five times more likely than white Americans to be unbanked. These colossal differences on the lines of race suggest that the US must both improve financial literacy within the Black community and decrease discrimination among banks. These marginalized groups then often have to rely on pay-day lenders, who’s interest rates are not federally regulated and can be upwards of 100%, which further exacerbates the racial wealth gap. Conversely, microfinance is regulated by the federal government with interest rates capped at 25%.


Microfinance Funds Innovative Ventures:


The core concept of microfinance is helping the underbanked and unbanked populations, which are disproportionately those of minority ethnicities. Through granting micro-loans at low interest rates, the US will encourage entrepreneurship and innovation among black Americans, thus cultivating more equitable and competitive economic conditions. An increase in microfinance in the US would be especially conducive to reducing racial income disparities; myriad studies have been conducted which indicate that this is the case. These studies and research papers also elucidate that microfinance has not expanded enough, when compared to the massive economy of the US. Hence, microfinance’s direct changes on income inequality have been modest thus far, leading to a debate among scholars as to whether it can be observed as a long-term panacea for the issue or not.

The microfinance movement was largely started to spur economic growth in developing countries, in which a vast majority of citizens have low incomes, along with lack of access to banks. The US has essentially been overlooked by most microfinance companies, because just around five percent of all citizens are unbanked, meaning that they have no access to banking institutions. However, there is an additional 13% of the US population, who are underbanked, meaning that they have bank accounts, but insufficient access to banking services. This is all to point out that microfinance organizations have cast a wide global net, often focusing solely on developing nations, because they are a much greater market than the US.


The US Still Needs Microfinance:


This assessment fails to consider that the US is built on small businesses, with 92 percent of all American companies being micro-enterprises with fewer than ten employees. If microfinance lenders can realize that there is also an important market in the US, a country that is the heart of innovation and social entrepreneurship in the world, there will be a substantive economic gain. By focusing microfinance on marginalized demographics, we can work to reverse the harmful repercussions of slavery and institutional racism in the US by converging racial income inequality. A growth of attention was brought to black-owned businesses in light of the Black Lives Matter protests in 2020, which proved to be very beneficial in boosting revenue for these companies. Something similar could be done in the microfinance movement, which was engendered to advance equity initiatives and reduce poverty. Ultimately, it is our duty in the microfinance movement to support minority entrepreneurs through micro-loans and education about financial literacy, in order to fully progress the economic state of our country.


How ZiM Can Help Converge Racial Wealth Gap:


ZiM and other microfinance organizations are committed to reducing the US racial wealth gap, both through microloans and education measures. ZiM works to promote financial capability within the African American community, by promoting volunteering events at Sacred Heart, Amigos de Guadalupe, and AACSA for students of the Leavey School of Business to use peer education. In these teaching sessions, financial tools such as accumulative savings, credit community and personal finance are emphasized in order to uplift economically marginalized groups.



 

By Ryan Sullivan

 

Works Cited


Abrams, Samuel. “Investing in--and with--Black Consumers in Financial Services.” McKinsey & Company, McKinsey & Company, 20 Sept. 2022, https://www.mckinsey.com/bem/our-insights/investing-in-and-with-black-consumers-in-financial-services.

Broady, Kristen E. “How Fintech Companies Can Mitigate the Racial Wealth Gap.” Brookings, Brookings, 9 Mar. 2022, https://www.brookings.edu/testimonies/how-fintech-companies-can-mitigate-the-racial-wealth-gap/.

Florant, Aria. “The Case for Accelerating Financial Inclusion in Black Communities.” McKinsey & Company, McKinsey & Company, 18 July 2022, https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-case-for-accelerating-financial-inclusion-in-black-communities.

Fox, Michelle. “Black and Hispanic Americans Pay Twice as Much in Bank Fees as Whites, Survey Finds.” CNBC, CNBC, 13 Jan. 2021, https://www.cnbc.com/2021/01/13/black-and-hispanics-paying-twice-amount-banking-fees-than-whites-survey.html.

Klein, Joyce. “A New Tool to Address the Racial Wealth Gap.” The Aspen Institute, 23 Apr. 2021, https://www.aspeninstitute.org/blog-posts/a-new-tool-to-address-the-racial-wealth-gap/.


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