Microfinancing is the one finance mechanism not being impacted by the current crisis in the finance markets. According to Muhammad Yunnus (founder of Grameen Bank and winner of the Nobel Peace Prize for his pioneering work in microfinancing) it continues to grow. The difference between microfinancing and traditional financing is that it is secured on relationships not assets. Grameen set up circles of trust where you could get a loan without any assets provided you had a circle of trusted friends who did the same – if any one person defaulted, then all could not get another loan. If all paid up, they could apply for larger loans. Default rates on microfinancing remain at 1% to 2%.
Modern financing, on the other hand, are secured on assets, which are worth whatever the market decides they are worth. The current credit crisis is not a credit crisis – there is more money swishing around then at any other time in history – it is a trust crisis. Trust not in people, but trust in the value of underlying assets in both securities and companies. The current crisis is forcing a reassessment of how we build and measure trust. The principles behind microfinancing may end up being more than a means to lift people from the poverty trap, but a stark lesson to the finance market on how to keep people from falling back into it.
In the meantime, Muhammad remains busy. This week he linked with Carlos Slim, the second richest man in the world, to bring Grameen Bank to Mexico.