Microfinance and the credit crunch | Sub-par but not subprime | The Economist

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Finance and economics

Microfinance

Lending to the poor has held up well but it is not as safe from the credit crisis as its champions hoped

A GLOBAL credit crisis caused by subprime mortgages is hardly the ideal backdrop for a business making unsecured loans to poor people without a credit history. Yet big microfinance companies, which do exactly that, seem to be in rude health. Mohammad Yunus, the unflappably optimistic founder of Grameen Bank in Bangladesh, a microfinance institution for which he won the Nobel Peace Prize in 2006, is adamant that business remains unscathed. “We have not been touched in any way by the financial crisis,” he said on a recent visit to Japan. “The simple reason is because we are rooted to the real economy—we are not paper-based, paper-chasing banking. When we give a loan of $100, behind the $100 there are chickens, there are cows. It is not something imaginary.”

He is not alone in thinking that microfinance is insulated from the problems of the global economy. Its proponents argue that any similarity with subprime loans is misleading. Microfinance institutions (MFIs) lend relatively small sums of money to people in developing countries to start small, profitable businesses, not to buy overpriced homes. Many of those businesses serve local needs, which has more merit at a time when exports are collapsing. And microfinance’s reliance on peer pressure for repayment must be the envy of any mainstream banker struggling with rising foreclosures and “jingle mail”; delinquency rates are microscopic.

Some MFIs, however, do not enjoy the same isolation that their borrowers do. Many of them are funded internationally. According to the Consultative Group to Assist the Poor (CGAP), a research centre in Washington, DC, foreign-capital flows into microfinance tripled between 2004 and 2006. About half the industry’s funding ...

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