By: Jim Taylor

A credit system built on trust

After I wrote about the collapsing U.S. sub-prime mortgage market in July, two things happened almost at once.

        First, I got plaintive inquiries from individuals who wanted advice about moving their investments from risky equities and/or mutual funds into bonds and bank certificates.

        I told them I wasn’t qualified to give that kind of advice.

        But I reminded them that the supposedly “safe” interest paid by banks and trust companies depends on letting them use your money to invest in the same equities, mortgages, and hedge funds that you’re trying to avoid.

        The second thing, just a week after my column appeared, was what the Edmonton Journal headlined as a “Massive Meltdown” in stock markets.

        In a few disastrous days, both New York and Toronto markets lost everything they had gained all year.

        They’ve rebounded since, but the ripples still echo.



When the bubble bursts

Does it have to be this way?

        It seems inevitable in a “macro-credit” economy that presumes continuous growth and continuous inflation, both fuelled by credit. Individuals and corporations dive into debt, so that they can buy homes or cars or competing businesses, which they will eventually pay for with dollars that they hope will be worth far less.

        A personal example: our house in Toronto cost $28,000 in 1969; in 1993 we sold it for $160,000. Same house, so each dollar bought one-fifth as much house.

        Meanwhile, lending institutions count on collecting enough interest to compensate for the declining dollars they will get back.

        Clearly, this becomes a delicate balancing act.

        Consider the U.S. subprime mortgage market. While housing prices soared, borrowers leaped into mortgages like a Labrador retriever hitting the water. Lenders like Countrywide Credit encouraged people to borrow more than they needed, at rates higher than they needed to pay.

        Then the bubble burst. More than 30 subprime lenders went bankrupt. According to a CBC report, “one subprime loan in eight was in default across the U.S.” Foreclosures mushroomed. Some estimates claimed that “as many as 1.5 million Americans could lose their homes.”

        To be fair, other sources cited lower foreclosure rates. Even so, the CIBC’s Jeff Rubin forecast, in Canadian Business, that “soaring delinquencies on subprime mortgages will eventually lead to a 30 per cent default rate.”



Micro-credit principles

Compared to that, wouldn’t a 99 per cent repayment rate sound good?

        It’s real. But it depends on micro-credit, not macro-credit.

        Micro-credit operates in the world’s poorer countries. Most of the loans are so small that they would cost conventional institutions more than they’re worth just to process them.

        In Bangladesh, for example, the Grameen Bank makes loans as low as $10. To help beggars break a lifetime habit of depending on handouts.

        In Central America, Leslie Yaneth Rodriguez borrowed $105 from Uniedo America, a foundation run by Rotarians in Honduras. She bought equipment to set up a snack stand at a local soccer field. She cooks empanadas and churros on a wood fire. On a good Sunday, she can net $40.

        Micro-credit functions on two principles – both the antithesis of North American credit policies.

        First, it loans money to people who really need it. In our system, the wealthiest find it easiest to get credit. Lenders love applicants who have abundant assets as collateral.

        Applicants for micro-credit have no assets – no bank accounts, no credit rating, no financial statements. Just themselves.

        The loan officer has to determine whether this person, this human being, has the potential of making good use of a small loan.



Women’s collective

Most receivers of micro-credit loans tend to be women – another difference from North America. When my wife got her first credit card, the Canadian bank required me to co-sign for her – although at the time, she had fulltime employment; I didn’t.

        In principle, micro-credit is “open to all those who want to help themselves,” says Vishnu Dhandhania of Calcutta.

        In practice, says Deborah Lindholm, who organizes Rotary micro-credit from La Jolla, California, most programs are “100 per cent women, because women repay. Women want a better life for their children, so they work hard once given access to credit to build income-generating activities that will benefit their families.”

        Second, micro-credit operates on trust and mutual co-operation. It makes borrowers and lenders responsible for each other.

        Leslie Rodriguez now acts as treasurer for six other women in her village who have also received loans. Members pressure each other to pay on time. If one member falls behind, the others cannot take out new loans.

        Meanwhile, the loans officer provides training in keeping records and handling income.



Not charity

 Credit for the micro-credit concept usually goes to 2006 Nobel Peace Prize winner Muhammad Yunus and the Grameen Bank of Bangladesh. The Grameen Bank claims to have provided five million small loans since 1976.

        Churches have known for decades that small amounts of money can have big effects. In the early 1970s, I saw for myself how just $50 worth of cement could let a village in Malawi protect its water supply from pollution and runoff. And how $150 enabled a fisherman in Antigua to repair hurricane damage to his fishing boat and resume earning an income.

        The difference is philosophical. Muhammad Yunus promotes micro-credit not as charity, but as a basic human right.

        “When you give money,” explains Deborah Lindholm, “you imply, ‘You can’t do it; I have to help you.’ When you give a loan to someone in need, it says, ‘I believe in you. I will stand with you.”

        Micro-credit loans do charge interest – about three per cent per month, which seems high by North American standards. But it’s far lower than the 100 per cent per week often charged by loan sharks. And most micro-credit loans are fully paid off in six months.

        The interest sustains the lending fund, and also builds savings for participants.

        Does it all sound too good to be true? It’s not.

*****************************************
Copyright © 2007 by Jim Taylor. Non-profit use in congregations and study groups permitted; all other rights reserved.
*****************************************