Microfinance grows as the finance markets fall…

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.

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4 Responses

  1. Nice Site layout for your blog. I am looking forward to reading more from you.

    Tom Humes

  2. Dear Roger, agree fullheartedly with your insights on 1906 and microfinance. Insight means farsight . I view the current purge being about clearance and about finding lasting reality. This is almost being craved by the world now – much more so now than during the crisis of 1906, 1929, 1973, 1986, 1992 and 2000, and hence the purge is likely to be far deeper. The past century with its JPMorgans, quantum physicists, Hollywoods, Hitlers, Soviets, Beatles, Moons, Freuds, Microsofts and Secrets, really battled with the question if there really is reality beyond perception, and loved testing it to its limits. Realizing that perception (=valuation) in its extreme (boom) leads to reality (bust). Living in the dream world is a bit like eating too much sugar – you get addicted -regardless of whether you feel well or not, you need more of it…until it kind of is out of control, and we all know what that leads to; pain. I personally have been part of derivatives creation for the past 20 years. It surely has been fun. Nothing unreal about derivatives, just like with anything else, when we attach our dreams to them and use them without the touch of reality, we surely get a nice trip to ‘the other side’. 3 trillion dollars exchanges hands in derivatives volumes every day in the world, still. As Buffet said, derivatives are weapons of mass financial destruction. Yet lest not forget -it is never the weapon that has done anything, it is the human using it that does it. Let us not forget that and let us get real. Let us do microfinance and make sure microfinance does not mean consumer lending and all those nice things that made it feel so nice to us over the past century.

  3. […] Roger Hamilton’s World Wide Wealth:  Microfinance grows as finance market crashes […]

  4. With a background in working with both micro-finance with NGOs in the Third World and Finance in the so-called First World; My question would be: Is there a way we can create a new approach to bring both approaches closer and the 1st w learn from the 3rd w? We need to learn from our greed and create a new more sustainable CSR future!

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