Saturday, February 10, 2007

How to lend to the poor without a collateral

Vikram Akula of SKS Microfinance says how: "We use a system based on trust. That is, we built our group lending system based on the trust that exists among the poor. Specifically, we adopted the joint-liability model first developed by the Grameen Bank of Bangladesh. Within each of our centres, you’ll typically find 40-60 members, divided into groups of five. These five-member groups serve as guarantors for one another, so if one member can’t pay, the others will make up the difference. If that five-person group cannot pay, the entire center comes forward to pay the remaining amount. In this way, members are held accountable for each other. This system based on trust—we take no collateral whatsoever—boasts a 98 per cent repayment rate, a rate unheard of in the commercial banking world." For more of his thoughts, go here.