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Ask Money

Microfinance and the financial crisis?

Chris Farrell Oct 22, 2008

Question: With all this talk of the credit crisis, I’m wondering what’s become of microlending and those microlending companies you’ve covered in the past. Maybe you could do a follow-up on some of them? Thanks, Spencer, Andover, MA

Answer: My suspicion is that microfinance will do well–and maybe even expand–during the financial crisis. Certainly that’s the point of view of Muhammad Yunus, the founding father of microfinance. The modern microfinance business began when Yunus established the Grameen Bank in 1983. It offered very small loans to impoverished people, mostly women, to finance small business ventures. The Grameen Bank, which won the Nobel Peace Prize jointly with Yunus in 2006, now has a far more solid loan portfolio than many global commercial banks. In a recent interview with Business Week. Yunus said, “Our system is based on trust, not collateral or guarantees, and still the people pay back.”

Swaminathan S. Anklesaria Aiyar agrees. A leading Indian journalist and consulting editor to the Economic Times recently wrote: “This is extraordinary. Big financiers lend against collateral, a back-up if their borrower defaults. But MFIs [microfinance institutions] lend with no collateral at all. Big financiers lend to the most creditworthy corporations. MFIs lend to poor women whom nobody in history considered creditworthy before. Yet, the secured loans to big corporations are bombing, while unsecured loans to poor women are being repaid in full.”

The track record is good. The need is there. The microfinance world is one where very small sums can make a big difference. And for many people the lure remains: Even though most microfinance institutions are started with public or philanthropic money, or money from other sources, many eventually become self-sustaining, profit-making enterprises.

It’s a story well worth following. Thanks.

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