OPINION> Commentary
Microfinance principles a good foundation
By Jacques Attali (China Daily)
Updated: 2009-03-19 07:22

Microfinance ought to be high on the agenda of policymakers looking for an imaginative response to the global financial crisis.

As an ethical, responsible financial system that serves productive businesses through intimate knowledge of the client, it is founded upon principles that are diametrically opposed to those practiced by the conventional bankers that sparked the crisis.

On the face of it, microfinance would seem too small an activity to be of significant importance in the on-going global financial crisis. It concerns only the world's poorest entrepreneurs, who borrow only a few hundred dollars per year in order to secure their working capital, or to develop their small business. Globally, microfinance is a $30 billion industry, which only represents a small percentage of the $80 trillion global banking system.

In the past, critics have been contemptuous of microcredit institutions as unglamorous and backward, far from the financial cutting edge of hedge funds or derivatives sloshing capital around the world from London to Tokyo to New York, an embarrassment to neighborhoods and cities where access to conventional banks is regarded as a sign of economic and social progress.

This stigma has rapidly faded, however, as everyone now recognizes that the source of the current disorder is a financial system that has profited through excessive lending to consumers or businesses that do not necessarily have the means to pay them back. Further, by transferring the risks of these credits to others through securitization, banks became detached from economic reality.

The principles of microfinance offer a sharp contrast to the dysnfunctionalism that now plagues the global financial system. They should inspire any effort by the G-20 or other bodies to reform the global financial system:

First, the philosophy of microfinance is to help its clients become autonomous by granting them credits that generate revenue, rather than increasing their debt beyond their means of repayment. The goal of microfinance is to offer sustainable financing, not to engage in irresponsible speculation. Had the American banking system applied the principles of microfinance, the subprime crisis would not have emerged.

Secondly, in microfinance, credit agents know their clients and have a precise idea of their repayment capacity. Had the investment banks applied this principle, they would never have embraced the blind purchase of loans from distant, unknown clients enabled by opaque securitization.

Thirdly, by keeping the credit it grants on its balance sheet - loans which are sometimes not even backed by collateral - a microfinance institution also retains the risks. Had the banking system applied this simple principle, risk-analysis would have been sound instead of deluded by the illusory value of securities with misleading ratings and dubious underlying assets.

Finally, the moral stance of microfinance is to serve businesses, not itself. Its purpose is to help client businesses make profits, not maximize its own take. Even though interest rates are high in microfinance, the profits it generates are inferior to those of the businesses it finances. If the conventional banking system were to have followed this principle of microfinance, its overall profits would have been lower because they would have been plowed back into new lending, but they would have been part of an industry growing in double digits.

The integration of these four founding principles of microfinance ought to be at the heart of any movement to reform global finance. The ethical principles of microfinance are not somehow archaic, but, on the contrary, the basis of the future of finance in a reeling world seeking the return of ethics and social responsibility over greed.

To be sure, convincing the pinstriped suits of Wall Street and The City, whose arrogance remains intact despite their debacle, to hear out these barefoot bankers will be no easy task. Yet, do we need any more proof than what we already have that new alternatives to a collapsing global economy are necessary?

However bold the prescriptions of political leaders in the developed world may be, the fact remains that these economies are so saturated with excessive debt that it will be years before they generate the demand required to get the global economy moving again.

That demand will have to come from elevating the world's poor. Microfinance, with its proven record and ethical purpose, is the key to that goal. The potential for growth among the poor is enormous. A responsible financial system that stimulates entrepreneurship at the bottom and earns income for the poorest is a benefit to us all.

The author is the founding president of the European Bank for Reconstruction and Development, is president of PlaNet Finance, a global microcredit agency, whose China based staff have an office in Beijing.

(China Daily 03/19/2009 page9)