Affordable Housing Institute : US

Is lending about trust or distrust?

 

All others pay cash?

 

Sherlock Holmes believed that debt says, I don’t trust you.  As he put it:

 

 “Consider debt.   I lend you money, which you promise to repay, in regular installments.  Everything about the transaction breathes distrust.  In fact, while I personally am no romantic” — Watson broke out in a fit of coughing — “I rather imagine that the faces on bank notes, as they are being passed over by a loan officer, speak words like these.”

 

 

 

“You have violated your loan agreement.”

 

“I quite take your point,” said Watson.  “Even the word ‘indenture’ reminds us of our fiscal servitude.  But do not all capital relationships imply a similar dependency and superiority? “

 

In the developed and formalized world they do, but in the global south, lending is much less administrative and much more personal, as revealed by this interesting exchange between Wall Street Journal interviewer Emily Parker and Muhammad Yunus of Bangladesh’s Grameen Bank:

 

 

I mention that Mr. Yunus’s way of doing business seems like an “old-fashioned” notion of credit, which a few centuries back was apparently closer to the Latin credere (to believe or trust). To have “credit” in a community, for example, meant that you could be trusted to pay back your debts.

 

Credulity, according to Hogarth right alongside superstition and fanaticism

 

“I use to say this in my speeches, in the early days,” he responds. “I said: look at the world, how funny it is.  They took the word credit which means trust, and built a whole edifice of credit institutions, refined, very sophisticated, entirely based on distrust.”  At Grameen, he says, “we went back to the original meaning of credit.”

 

It’s incredible what you can do if you believe in yourself

 

In doing so, Mr. Yunus and Grameen have returned to one of the two great strands from which banking arose, the credit union, where everybody pools their capital, and everybody knows everybody else:

 

Grameen works a little differently from your average American financial institution. The Grameen banker comes to the borrowers, either in their homes or businesses. Women borrowers take priority. There is no need for collateral, credit-history checks, legalities or complicated paperwork. Just credit, plain and simple.

 

Instead of hardware and software, Mr. Yunus’s lending relies on wetware — people’s knowledge of each other.

 

Daily savings/ lending cooperative ledger book, Mumbai

 

“Because not only are we poorest, [borrowers] don’t have collateral, they don’t have guarantees, they don’t have lawyers, nothing.  How risky can you get?  Still, our money comes back.”  Grameen has claimed that over 98% of their debts are repaid.

 

Compared with the massive financial edifices that lend to millions of individuals, Grameen’s lenders have several assets:

 

1.         Tight credit.  Grameen won’t allow its borrowers to become over-levered:

 

“When borrowers inflate their demands, you don’t know how to screen it,” he says of the U.S. system. “In our bank, a borrower can say, I want $10,000 — I don’t think any Grameen bank anywhere will give her $10,000.  We know what is the limit within in which we operate.”

 

2.         Small loans, very short duration.  The core principle of microfinance is baby steps, bite-sized pieces.  The resulting interest rates are high — if measured in abstract percentage terms, but small measured in dollars and cents. 

 

The more cycles, the stronger the network

 

3.         Tiny geography.  They lend only to a very small community, and their loan officers know where everybody lives.

 

4.         Group peer pressure.  Loans are made to people who are well established within an ethnic or tribal community, so there is a constellation of people.

 

Each borrower joins a group of people from similar social and economic conditions, and the group approves the loan request of each member. In this way, the group assumes “moral responsibility” for the loan.

 

The Board of Directors, Mlolongo savings cooperative, Nairobi, Kenya

 

In other words, Mr. Yunus turns the community into his own wetware credit bureau.

 

5.         Strong collection procedures.  They pay close attention to their borrowers, and use the most basic of penalties — denial of future credit.

 

Why is Grameen’s debt-repayment rate so high? “Self-interest,” is one reason. “For the first time, she has been given this opportunity to make money, make an income. Now she has a choice: she can pay back the loan so that she can continue with this door open and she can move on step by step. Or she says, enough is enough, I’m not going to pay back, I’m going to enjoy the money I got. What happens? The door gets closed.”

 

No microcredit for you, young lady

 

Over the last year, I’ve quizzed people around the world who make small loans; universally, they have a principle of denying credit to a delinquent borrower for a period roughly equal to the (short) term of the defaulted loan.

 

Mr. Yunus freely acknowledges that the free market has done a great deal for the poor. “I didn’t say that what is there is wrong. I said the structure was not complete. One piece was missing. We couldn’t express within the business world all the things we want to do for others.”

 

Mr. Yunus is right; the talent updraft tends to sweep up the best and brightest, who migrate up the income pyramid away from banking the very poorest.

 

If not us, who?

 

At the same time, Mr. Yunus’s lending almost certainly violates all the anti-discrimination and anti-redlining laws applicable to banks.  That’s the wetware credit bureau’s downside — if the community doesn’t like you, you’ll be frozen out.

 

Still, as I’ve posted before, financial velocity is an intrinsically good thing, because it liberates people’s minds to be entrepreneurial:

 

As we saw in my five-part series on Turkey, capital liquidity triggers an economic boom, and as a result affordable housing becomes a rising political imperative. Innovation begets wealth which begets capital, which begets more innovation:

 

The Journal echoes these sentiments:

 

Increasing options, after all, is what Mr. Yunus is about. He looks at a poor person and sees a potential entrepreneur. By increasing individuals’ economic power, he gives them greater freedom to make their own decisions.

 

Who’s most often the victim of credit bigotry?  Women:

 

Savings collaborative, Mahila Milan, Mumbai

 

Mr. Yunus’s use of the female pronoun is not accidental. He says Grameen Bank’s borrowers are 97% women, the result of a very deliberate policy.  

 

Something like 75% of Patrimonio Hoy’s borrowers are women.  So are most members of Slum Dwellers International. 

 

 

Liberating credit empowers women. 

 

It all started when Mr. Yunus complained that Bangladesh’s banks weren’t lending to women at all. “I was trying to show in how many different ways conventional banking went wrong. So when I began I wanted to make sure that I do not face the same complaint against me. So I wanted to have 50% of my borrowers as women.”

 

A few weeks ago in Colombo, Sri Lanka, I facilitated a mock loan meeting with members of the SDI finance committee, where each in turn presented his or her proposed capital advance, and the others quizzed the mock borrower. 

 

My traveling office: a laptop in a backpack

 

I was struck by their mutual blunt pragmatism — they beat each other up pretty well.  All I had to do was write down what they said.

 

Mr. Yunus likes to tell a story of going into a village and meeting one of his borrowers, whose daughter has risen to become a doctor. “You look at the mother, that illiterate woman who borrowed money to raise chickens, to buy a cow to send the daughter to school, and now she’s a doctor.  And I get the question in my mind: the mother could have been a doctor too,” he says.

 

The wetware credit bureau works because people are smart.  Tell them the rules, demonstrate that the rules apply to everybody, and they can move mountains.

 

A savings cooperative passbook, Mumbai

 

“The whole thing is about making those opportunities available, so that they can change their lives.”

 

Aim high

 

 

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