The Difference Between Investment Banks, Hedge Funds, Credit Card Borrowers and Microcredit: "The Poor Always Pay Back"

Just look at the following article in the Wall Street Journal today entitled, "For Bankers, Trust Becomes a rare Commodity."

This is why trust needs to be brought back into the equation. The thing is, some banks still operate with large prfots and high payback rates...they are called "microcredit banks."

These past days and weeks, after a week in New York, and buried in the Financial Times, Wall Street Journal, tracking stocks on Yahoo Finance, receiving and making calls and emails to and from friends in various places, the one thing I find absolutely amazing is how different this "first world" financial behavior is from that of those involved in microcredit. The Poor Always Pay Back is the title of a book about the second stage of the Grameen Bank, created by Muhammad Yunus, the 2006 Nobel peace prize winner. Written by Asif Dowla and Dipal Barua, it underlies the fact that the Grameen microlending model has been replicated in over 100 countries. And unlike the hedge funds, US borrowers and investment banks, the payback rate remains well over 95% and up to 100% in the case of Kiva.org, which allows individuals to make microloans around the world via the internet.

Why? This money is not heavily leveraged. There is no pyramid-scheme type repackaging of debt. Debt is something to be paid back. In the U.S., I often heard about how one had to owe money to make money, that homes were not to live in but investments to "flip." In other words, the money loaned, and paid back, on time, is linked to concrete realities, products, education, not consumer debt, or inflated bubbles of real estate values in the Western world (which became inflated because the cheap money and the flipping lead to artificially high "asks"). Cheap money, low percentage rates may appear superficially to encourage growth, but the reality is that high-interest microloans, paid back, lead to long-term sustainability. The bubbles will not burst, because there are no bubbles. People are not spending time shopping for flat-screen televisions and flipping their rice paddie property. They know what matters and are focused and borrow and spend appropriately.

The poor always pay back because they have nothing left to lose and they have been given credit, with no collateral, based on trust alone, to actually create true small business and make real improvements to their lives and the lives of their children. There is no trust in Western banking these days...neither within the banks, nor between them, nor amongst the customers. Banks calling in loans from Carlyle Capital, part of the Carlyle Group, represented by some of the supposedly most well-respected people (men) in U.S financial and political spheres, simply do not believe they may be paid back, they don't trust those they lended to when times were good. In Bangladesh, an impoverished borrower from the Grameen Bank who loses everything in a disastrous monsoon-caused flood does not have his or her loan "forgiven," they are given a second loan to begin again and pay off the first loan. How many banks out there (besides the Fed?) are ready to do this right now? You could get a second mortgage, but it was all based on inflated values, nothing was explained to the sub-prime lender, and on top of all that, there were credit card debts. Debt was and is becoming a prison for many in the United States.

Microcredit borrowers are proud to be borrowers, to have been given credit in the first place, and to be part of a community in which they are trusted and that trust alone has real value. How many financial deals these days are made in New York and London and Geneva purely based on trust? Borrowers in the U.S. are unable to pay back their sub-prime loans, the their ridiculously large credit card (consumer) debt, and are preferring to walk away from (or burn down) their homes than make payments. People are wondering when the first bank will fail. The gut feeling I had when I first read about Northern Rock turned out to be true. But we cannot keep propping up financial institutions. We need to look at those which are successful and learn from them. This means taking microcredit institutions seriously.

We need to learn to trust our instincts and get back in touch with them. Did anyone ever wonder if overeating, overconsuming, and feeling depressed and empty after doing both, were linked? Like expensive, illicit sex, does one actually feel better knowing one is risking losing the trust of those we respect (including ourselves) for some short-term pleasure? U.S. borrowers do not trust themselves. Banks do not trust themselves, nor their clients to repay, nor other banks. They have no security at the moment, and are losing their self-respect. They have been, in fact, "acting out," as have the investment banks and hedge funds and sub-prime lenders. They grow obese, feel empty, become depressed, and instead of getting at the root of the problem, go shopping some more, take antidepressants, and wonder why things don't improve. In other words, they create excess empty fat, "the bubble," which is unhealthy, and then try to cover it up. It simply could not last.

Now maybe at least, with the credit cut off, they will have to face reality, and deal with their problems instead of avoiding them. Instead of borrowing in order to "flip" a property, buy a flat screen tv or designer purse, perhaps we can all focus, create real homes and spend more time on what really matters and less time just "spending."

This does not mean not enjoying life...in fact, it means just the opposite, remembering how simple and wonderful life can be, when trust and self-respect exist hand-in-hand.

Follow Vivian Norris de Montaigu on Twitter: www.twitter.com/vivigive

Comments

[ndem]

This last comment is true...where there is trust, people pay back. Without trust the entire financial system is a shambles. Why should they pay back something someone hoodwinked them about? When others made billions off a bubble which hurt them? With microcredit, there is trust, ths people pay back.

[mbaty]

People will pay back real debt, that is, debt that they feel they legitimately owe, but when Trust goes out the window, like when a mortgage payment doubles with no warning, or when excessive fees are added arbitrarily, the consumer, logically, chooses to walk away--they've been betrayed, hoodwinked! And that's how it feels, like the institution has no concern for their actual well being, but only interest in gaining more money, even if that means nickel-and-diming everything. Our economy must be based upon the principles that we are all one, and there is enough. This isn't just in matters of money, but on matters that are vital to communities around the world.

[ElkoJohn]

`
thanks for the link to kiva.com
I have always believed in capitalism on the small scale
not so the macro scale
feels good to do some good
with the money I have earned
and let it keep lending
.

[maggiemae656]

"Now maybe at least, with the credit cut off, they will have to face reality, and deal with their problems instead of avoiding them. Instead of borrowing in order to "flip" a property, buy a flat screen tv or designer purse, perhaps we can all focus, create real homes and spend more time on what really matters and less time just "spending."

This does not mean not enjoying life...in fact, it means just the opposite, remembering how simple and wonderful life can be, when trust and self-respect exist hand-in-hand. "



I love this advice. I think we could have a much more full life if we spent less time going to stores shopping for things that we really don't need. I am particularly jaded in the quest to purchase things not only from the aspect of the time factor involved with making all these purchases, but the sad fact that, upon arriving home, so many of the purchases turn out to be of poor quality--in the end not worth the time and money. Personally, I am working towards a reduction of consumerism in my life, and find that life is actually better without so many "things". And there is more time to enjoy what I have.

[ndem]

Microcredit when done right, is indeed a lot like a true mutuals and credit unions...where the borrowers are also owners of the bank thus even high interest rates are paid back into the bank itself. Microcredit has high interest rates because of the hands on going to the customer approach in much of the world. This simply costs more.

[crom]

Dady, please help me: "Is it truth that the dollar is disappearing?"
Dear son, "our new private currency is called $euro, our new private central bank is called independency and our public debt has become world fraternity."

[Sundialsvc4]

"Microcredit."

Nice word for a loan-shark.

[ndem]

The last comment is not true for bankers dealing with microcredit borrowers in much of the world. Trust is indeed a huge part of the equation...in fact, the borrowers usually have to be convinced to trust the banks in the beginning NOT the other way around! Actually the statistics for microcredit borrowers "the truly poor" paying back is very encouraging. Bankers in the West are often amazed when they hear these numbers, of over 98%..uo to 100%.. The reason the poor in the West have a hard time paying back is that they are in a system of what we are learning now were unfair sub-prime mortgages and consumer credit card debt. The poor in much of the world are not besieged by advertising pushing us to buy what we don't need. There is neither a family support network intact not a system helping people out with child care, education and health insurance.

[Henry]

microlending as a "concept" has nothing to offer that credit unions did not once offer. As time proceeds and in generalizaation, "lending is as lending does".

http://www.infochangeindia.org/analysis136.jsp

[Henry]

Most bankers in this country (who are worth their profession) will disagree with your assertion that the poor always pay. I believe there is empiracle evidence that in these United States, poor people are (all other things remaining equal) higher credit risks to the bank.
You can wax idealistic about some romantic notion of Pakistani lending, but you should'nt make the mistake of generalizing about trust. These are entirely different ball games. Lending from square-one, micro lending to small producers, is local, and it's return is easily understood by the multiplication of capital. Trust me it is the same equation at a different stage. Give the Grameens a couple of centuries for the development of the capital infrastructure and you'll observe the same greed, ugli-ness, and indifference that plagues us.

[drkazmd65]

The poor do always pay - IF they feel part of the community that loans them the money. Feeling that you owe others in your own tribe/social group/community a debt to be repaid is a very different thing than feeling you owe some ruthless, heartless, corporate money machine money.

Microloans work simply because it is a small, usually inter-related, group of people that feel part of a group feel that they owe each other payback. It's a tribal thing. That's where the trust comes in.

[peterg76]

One reason economists are so divorced from reality is that they don't distinguish between creating wealth and just moving it around.

[Durango]

I thought that was MBA's?