Sunday, August 19, 2007

Microfinance vs Subprime lending

Yep, I'm back. Yep, bin bizzy. Nuff sed. (Well, prob'ly I'll share some fun bits in future posts.)

Many topics have been churning through my head as really good blog topics. This topic broke through the threshold first, mostly because I wrote the core of it for another purpose and figured, hey, it's all about leverage.

A few weeks back I enrolled in an online certificate program with Colorado State. My first course was Microfinance and the Role of Women in Development. I read Muhammad Yunus' must-read book, "Banker to the Poor" as part of the assigned content. I just finished and submitted the last assignment, which was to define a microfinance program for a particular area. I chose Haiti as my target area. I have no connection to Haiti other than having read about it in both (also must-reads) "Mountains Beyond Mountains" (Tracy Kidder), and "Collapse" (Jared Diamond). It just seemed like a good target. Somewhere in the mental processing involved in my assignment, the connection to the subprime situation came to my mind, so I wrote an "afterword" to my assignment. Read on...if you dare!

I want to comment on the contrast between the micro-finance programs delivered in the developing world, and the "subprime mortgage" situation in the US (which has been all over the news in the US, and probably fairly prominent in the financial news elsewhere in the developing world, as repercussions from the subprime crisis echo through the various stock and bond markets).

My comment is that there is similarity in that in both cases there is the idea of lending to people who historically did not have access to credit. Also, interest rates are typically higher for subprime borrowers than for "prime" borrowers, just as they are higher for micro-borrowers. Similarities seem to end there. Differences are that, while microfinance focuses on increasing economic productivity, subprime lending was for housing (which at least in the US is not likely to boost productivity). Lending to subprime borrowers is not done in "groups". It is very difficult to restructure the subprime loans (often that is why subprime borrowers default, because they are unable to refinance). Lenders do not maintain relationships with the subprime borrowers. The way loans are typically handled in the US, the loans themselves are "sold" to a third party who has no direct connection to the borrowers. Other big differences are that the subprime loans are secured (which effectively makes it possible for banks to leave the door open for defaults), that the terms of the loans are long, and the payment period not so frequent (monthly instead of 2 or 4 times per month) so that trouble is not spotted as quickly.

I don't know if the subprime lending concept or movement was inspired by the success of micro-finance, but if so, it's clear that there is so wide a gap between the real world versions of these programs that it's not appropriate to predict success of one from the success of the other. Also, given the legal/political/cultural differences between the US and the developing world, it's not at all clear that micro-finance ideas are workable today in the US. Yunus seems to acknolwedge this in his book as well.

Okay, well it wasn't really that big a dare. I guess a bigger dare is to myself: dare ya to post again within a week!

Ooh! Now that's a dare!

[Afterword to this post:
After I wrote this post, I moseyed back through adding hyperlinks. Adding the hyperlink to the Wikipedia article on Microfinance was illuminating. Seems like I might have read that article as part of my class, but nope. The criticisms are informative, and yet my sense is that many microfinance programs are beneficial in the "do-more-good-than-harm" sense.]

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