Who is Credit-Worthy?

Thus far the western worlds system of extending credit to individuals and corporations is based on the notion that WE will give you credit only if you have sufficient assets to meet the loan in case of default or the asset itself is sufficient to secure the loan. Therefore the premise becomes, 'if you have assets we will lend you money so you can accrue some more wealth'. I think we all know that in such a system the rich get richer and the poor remain the same or get poorer and this is the kind of thinking that enables this 'rule'.

I've heard it said that the current economic meltdown was initiated by the collapse of many financial institutions triggered by the failure of the 'sub prime mortgage' market. And I've heard financial commentators, in almost accusatory tones of voice saying what just about amounts to "if we had not facilitated mortgages to the poor we would not be in this current situation".

Is this thinking sound? I think not.

It is true that 'stuff' costs far more if you are poor and the same holds true for mortgages. Poorer people are deemed to be bad risks and are therefore penalized enormously for the privilege. Recently here in Australia a businessman won the 'Businessman of the Year'" award by forming a company that enabled poorer people to own their own homes. He devised a scheme that operated a co-ownership system where the Company would always own a percentage of the home and the 'poor' person therefore only paid a percentage of what would normally constitute the mortgage. To my mind these mortgages were terrible; the owner could not rent the property out, could not move away for a period of time and there were more 'hidden' fees and conditions' than any mortgage currently available on the open market. In other words no one with the necessary privileges to allow them to operate more inclusively in the open market would deem that this 'product' had any advantage.

It made me sick to the stomach when this fellow received this award. The way I saw it was that he had devised a clever way to exploit the poor and been rewarded for it.

From memory it was not too long afterwards that the mortgage market 'opened up' and started offering sub-prime' mortgages. To my mind 'sub-prime' equates to 'sub-standard'. Such mortgages are extremely expensive; often setting up the borrower for inevitable failure. Greedy marketers jumped onto this bandwagon with their missing social ethics intact. These mortgages openly exploited the poor. No-one with access to a broader market would give these mortgages more than a second glance.

As I have mentioned in earlier articles I believe there are very enormous asset bases in our society that are currently untapped and I will talk more of this topic in further articles.

The Grameen banking system is entirely different; and in their own words, "Grameen Bank starts with the belief that credit should be accepted as a human right, and builds a system where one who does not possess anything gets the highest priority in getting a loan. Grameen methodology is not based on assessing the material possessions of a person, it is based on the potential of a person. Grameen believes that all human beings, including the poorest, are endowed with endless potential. Conventional banks look at what has already been acquired by a person. Grameen looks at the potential that is waiting to be unleashed in a person". Taken from the website 1^st march, 2009.

Institutions based on Grameen principles use what has come to be known as micro finance. Another successful micro finance model is that operated by Kiva.org. Kiva loans money relatively small sums of money donated by individuals in the1^st world to enable poor co-operatives to start up or expand their businesses. They too enjoy an extremely low rate of loan default.

What is very interesting about micro finance schemes is that they intrinsically have very low default rates. In other words, and this is something many already know, poorer people default far less. Why this is so is fodder for further articles and I think that a long term solution to the current global financial crisis has much to learn from the world of micro-credit.

Keep posted.