Despite the economic downturn, microfinance pioneer Grameen Bank continues to report nearly 100% payback rates for its loans to the very poor.
This bank, started by Nobel Prizer winner Muhammad Yunus, lends to people with zero credit, no collateral, and extremely low levels of income.
Aren’t the poorest mass-defaulting due to recent economic hardship? Not at all.
AP: “We have now shown that the poorest of the poor can be creditworthy,” he said in an interview with The Associated Press during a recent trip to Bangkok. “Our loan repayments are as high as ever.”
One part of Grameen’s success is that it involves many members of the same social group when approving and monitoring loans, increasing the social cost of default for the borrower. It also turns many borrowers into shareholders.
A group of five prospective borrowers from similar social and economic positions come together to determine an appropriate loan for each.The request then goes before a larger council of borrowers, who are also shareholders in the bank, and finally to the bank for approval.”
Furthermore, the bank focuses on lending for productive assets, rather than for mere consumption or asset speculation. How amazingly obvious this bank’s principles sound in retrospect.
Grameen also has been successful because it’s grounded in what he calls “the real economy,” rather than “fantasy economy” of ever-climbing asset prices. A loan for a goat, for example, produces tangible benefits that can support a family. “The closer you are to the real economy, the safer you are,” he said.
While not everything could be scaled-up and applied to large traditional banks — in doing so, you’d likely lose a lot of what makes this work — the underlying concepts should be taken to heart.
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