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Home » News & Opinion » What MFIs Can Teach Wall Street

What MFIs Can Teach Wall Street
Aiyar, S.

Big financial institutions of all sorts are in dire straits across the globe. But one category remains unaffected - microfinance. Even as the global financial system freezes and giants like Lehman Brothers collapse, microfinance institutions (MFIs) are expanding unfazed. Famous financiers face defaults big enough to wipe them out, but MFIs report virtually zero default.

How so? What lessons does microfinance have for Wall Street? The big lesson for Wall Street is that lending against collateral, supposedly prudent, can blind you to the need for checking the repayment capacity of borrowers. US banks happily gave mortgages of 100% of the value of houses during the housing bubble, and suffered when house prices fell. So did august institutions buying mortgage derivatives.

Microfinance, by contrast, has no collateral at all. MFIs deliberately keep loans small, well within repayment capacity. Some MFIs give first loans of just Rs 5,000 a year. Those who repay qualify for a higher second loan, maybe Rs 7,000, and the third loan can be still higher. But MFIs set an absolute loan limit, ranging from Rs 12,000 to Rs 25,000, depending on local economic opportunities, to guard against over-borrowing. Wall Street needs similar safeguards.

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Posted: 14 Oct 2008
Source: The Times of India
Originally Published: 12 Oct 2008