The world’s poorest more creditworthy than Americans

If you haven’t heard of microfinance, chances are you will soon.  The phenomenon, which has been around for a few decades, is becoming quite popular and is growing exponentially. 

In a nutshell, microfinance refers to extending credit, usually in the form of small loans with no collateral, to nontraditional borrowers such as the poor in rural or undeveloped areas.  In other words, poor people have increased access to banking services and to capital to grow their businesses, and therefore can lift themselves out of poverty.  Many experts believe that microfinance, as opposed to aid, is a much more sustainable and rapid way to eradicate world poverty.

In the past, primarily eleemosynary institutions have provided microfinance opportunities, but today private investors are getting more involved.  Why?  Brad Swanson, partner at Developing World Markets, explains why in a recent white paper:

“When properly conducted, microfinance is profitable, low risk and expanding financial activity. For example, from January to June 2007, the 26 widely dispersed microfinance institutions (MFIs) in Microfinance Securities XXEB, a $60 million collateralized debt obligation sponsored by Developing World Markets, had an aggregate annualized return on equity of more than 25% and were growing their loan portfolios by more than 50% on an annual basis, while their “PAR-30” (total amount of “portfolio at risk,” or loans with payment delays, beyond 30 days) was only 2.9%. This is a performance that any commercial bank would be proud to announce.”

The most impressive statistic touted by Swanson—of course, in addition to the 25% return on equity—is the low delinquency rate on the loans.  Some microfinance funds have a delinquency rate as low as 1.5% (30 days late). By contrast, Fitch's Prime Credit Card Delinquency Index recently reported that the delinquency rate on credit cards in the U.S. at January month end was 4.04% (60 days late). 

Across the board, microfinance institutions (MFIs) have created a system of accountability that keeps payment defaults and delinquencies low—and the system has proven to be recession proof.  For instance, many MFIs only issue group loans to women who are required to meet on a regular basis to provide support for one another and to repay their loans. If one member of the group cannot pay her portion of the loan, the other members must figure out a way to pick up the slack in order to keep the loan and to maintain their creditworthiness.  

In short, it seems to me that we can learn from the world’s poor who obviously are better managers of money than we profligate Americans are.

Comments

[Jordan]

Great article. Any idea how microfinance funds have been holding up the current global recession? I hope the answer is that they are still doing really well but I'd like to get some concrete evidence. The stats cited by DWM are impressive, but they are also suspiciously taken from an 18th month period that cuts off right before the economic downturn began.