Generally I make sure to give out impression as balanced person. I try not to go overboard, not to be judgmental and take precaution to avoid having to eat my own words.
Yet I feel a revolution underway. It is called Microcredit.
The concept is deceivingly simple. If somebody does not have credit history and has no collateral, give them a small loan instead of denying them loan. Give out large number of such small loans to spread your risk.
From business perspective, giving loan to somebody without credit history would seem like business suicide. But for some reason, reality is far different. USA has very well established credit reporting system that is a huge pillar of banking system here. A typical bank in USA, will give loan to somebody with a HR credit grade, albeit at a higher interest rate. But that bank will not even think of giving loan to somebody that has no credit history.
You can see that the loan default rate of people with the lowest credit grade (HR or High Risk grade) is about 14%, that means only 86% of them repay the loan. Compare this to generally observed loan repayment of around 95% to 98% rate as mentioned here and here. So the loan repayment behavior of world’s poorest people matches to the people with credit rating C, which is a fair rating.
How this works to reduce poverty? Answer is simple. Higher interest rates from loan sharks is what made them poor at first place. Lower interest rates as a helping hand will get them out of it.
Let me explain. Take a poor man in a village in South East Asia and ask yourself why is he and his family poor? The answer is their fathers and grandfather were poor. Why were their grandfathers poor? Because one time there was draught and the crops died and the grandfathers had to take loan from the loan shark. The loan shark charged them exorbitant rate which they were not able to repay. Eventually they were robbed out of their land. They lost means of their livelihood. They were thrown out of the flow of economy. Result? Poverty.
Now bring in micro credit. Small quick loans give them breathing space and work as shock absorbers for them in business uncertainties. But this time, the shock absorber does not consume their business. They have enough willpower and knowledge and work ethics. Over a sufficiently long period of time, they bring themselves out of poverty.
How the loan repayment rates are high> People understand real stakes in micro loans. They understand that repaying the loan is in their best interest in long term. Thus we see higher rate of loan repayment.
There have been some objections to overall micro finance and micro credit movement. A government agency disbursing funds in micro loans might end up starving other welfare programs. A bank going overboard with micro capital might starve large businesses. Only time will tell where we need correction.
But overall, today it seems like a step in right direction.