When Muhammed Yunus first got going with Grameen Bank there was all sorts of misunderstanding about what he\’s actually done.
Stripped down to its essence what he had really done was to replace the traditional measures of collateral with social pressure to repay a loan.
Borrowers are organised into groups, only one of the group cn have a loan at any one time, thus the other members of the group will apply social pressure to ensure repayment, so that they can take out a loan.
That\’s the secret at the heart of microfinance: not just lending small amounts to poor people.
However, even this new form of collateral is subject to the possibility of default:
MADOOR, India — India’s rapidly growing private microcredit industry faces imminent collapse as almost all borrowers in one of India’s largest states have stopped repaying their loans, egged on by politicians who accuse the industry of earning outsize profits on the backs of the poor.
If that social pressure to repay disappears then the industry is entirely fucked, isn\’t it?