Subprime and microfinance

That must be the problem

As the economy  goes from bad to worse, the general consensus seems to be that the trigger (although not necessarily the cause) of our current predicament was unwise lending to the subprime market.  There is plenty of debate as to who is to blame for this lending but at nearly every dinner conversation I have heard consensus on one thing: “making loans to the poorest parts of society is a bad idea.”

Like so many things, much of that statement is true but I am concerned that oversimplifying it will leave those most in need shut out from the power of well used credit.

Muhammad Yunus

In 1983 Muhammad Yunus started the Grameen Bank in Bangladesh (if you not read his book “Banker to the Poor” I strongly recommend reading it) and showed the world how lending to the poorest of society, those without credit history, with no collatoral, and with seemingly no ability to repay made not only good financial sense but was a powerful tool to raise people out of poverty.  Dr. Yunus broke every traditional rule of lending and showed that it worked. He loaned tiny uncollatoralised amounts, to groups of women,  in the poorest part of Bangladesh, at a modest rate of interest and found that not only did they repay with astounding certainty but that in the process his loans transformed their lives and helped raise them out of poverty.  Keep in mind that these customers of the Grameen bank would make the subprime consumers of America and Europe look like they were right off the set of Dynasty.

Its with Dr. Yunus in mind that I have been revisiting the early lessons of today’s Credit Crisis.  Immediately you realise that there are some important differences in the way Dr. Yunus lends money and how we did it in the sub-prime market:

• The Grameen bank loaned the money help people make a living.  We loaned it for non-income generating assets like homes or, worse-still, for frivolous consumer spending.
• The Grameen bank loaned tiny amounts.  We generally loaned large sums.
• The Grameen bank makes sure people pay their first loan before they receive another. We just kept lending.
• The Grameen bank loaned to groups of people who would help each other and share responsibilty for the loan.  We loaned to individuals and relied on their self-assessment forms.

The more I look at it, the more it seems to me that the lesson of the subprime crisis should not be to stop loaning to the poor but rather to change the way we loan to the poor.  Lending to to poorest parts of society is not only important but a crucial tool in helping families rise out of poverty — to stop lending to this segment of society would be a terrible mistake.  On the other hand, to take the painful events of today and create a new model for lending to the poor in the developed world which is based on the principles of the Grameen bank would be a wonderful lesson.