World’s Poorest Prove to be a Good Credit Risk

An article by Frank    3 Comments

Today the NZ Herald is carrying a great article about the success of micro-finance amongst the world’s poorest, with a focus on the Grameen bank founded by Muhammad Yunus.

The article shows the underpinning value system of the bank and demonstrates why micro-finance continues to be successful during recession through its connection to “the real economy” rather than artificially inflating or deflating assets. It also highlights the focus the bank has on loaning for income generation rather than consumption.

Whilst the demands of banking as we know it are different in terms of shere scale, with most banks working with much larger loan sums than Grameen, the micro-financing system still has some important lessons to offer the global banking sector that if heard, could inject a much needed value system that could shield the global economy from another plunge. Sadly, I don’t think the real lessons will be learnt. It’s not just the systems of our economies that need to change, but the very values that drive them.

The global financial crisis has highlighted a curious success story: a bank that doles out loans to some of the world’s poorest, least-creditworthy people continues to have a payback rate of nearly 100 per cent.

Nobel Peace Prize winner Muhammad Yunus, known as the “banker to the poor”, quips that the Grameen Bank he founded owes its success to “sub-sub-sub-prime borrowers” who also own nearly all the bank’s equity.

When Yunus approached traditional banks more than 30 years ago about lending to the poor in Bangladesh to start small businesses, he was told it could not be done.

But since 1983, the bank has lent more than US$8 billion to nearly eight million people in Bangladesh and had a 98 per cent repayment rate.

About four million more have been similarly helped through partner organisations in 38 other countries – with an average repayment rate of 95 per cent.

Yunus thinks his model could teach big commercial banks some lessons.

Read the whole story here: World’s Poorest Prove Good Credit Risk