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Credit crisis is nothing new for the developing world

The urgency with which the Obama administration, members of Congress, and Federal Reserve Chairman Ben Bernanke have been working to keep credit available reminds us how critical credit is to the economy.

The urgency with which the Obama administration, members of Congress, and Federal Reserve Chairman Ben Bernanke have been working to keep credit available reminds us how critical credit is to the economy. These folks know that without widely available credit, our economy would descend into a debilitating depression.

It’s easy to forget that most of our homes, cars and college educations are paid for with borrowed money, as is much business and government spending. Without credit, only those few with ample cash would be able to buy much of anything.

To see an economy without credit, go to the developing world — where credit is a privilege of the wealthy, but a pipe dream for the vast majority. Without widely available credit to prime their economies, many developing countries suffer rampant poverty, with 70 percent of their populations living on less than $2 a day. Large blocks of society (women, the indigenous) are denied access to formal banks, so for them a credit crisis is the norm. Without credit to fund an education, start a small business or buy farmland, these groups are trapped in poverty.

Poverty cycle perpetuated
Without credit, mothers unable to afford school fees put their children to work, perpetuating the cycle of underdevelopment and poverty. Unable to buy fertilizer, farm families experience low yields, hunger and malnutrition. Parents unable to afford mosquito nets watch helplessly as their children succumb to malaria. 

Denied access to banks, the poor resort to borrowing from loan sharks who charge exorbitant rates of interest that would make payday lenders in our country blush. 

Of course the poor have little collateral to make formal banks even consider doing business with them. But the innovative methods of Muhammad Yunus of Grameen Bank, John Hatch of FINCA International and other micro-lenders have substituted trust groups, training, peer-vouching, and frequent face-to-face meetings for collateral. Most microloans are under $300. Interest rates are commensurate with costs and are a fraction of the alternative. The majority of borrowers are women, who use the resulting earnings to provide a better life for their children.

High repayment rates
The results have been amazing. Tens of millions have benefited, sending their children to school, improving nutrition, acquiring basic medical care, and strengthening their financial footing. Unlike the widespread mortgage defaults in our country, repayment rates on microloans average 95 percent. And while the banking industry hovers near the brink of collapse, microfinance is thriving. Giants like ING, Citigroup and Deutsche Bank have taken notice and are investing in their microfinance partners.

The lack of access to credit is just one of many causes of poverty. But our recent credit crisis is a striking reminder to development policymakers that credit is as necessary for economic progress as hard work and education. Microloans, savings accounts, insurance and training allow the poor in developing countries to move toward financial stability.

While President Barack Obama and Secretary of State Hillary Clinton are ardent supporters of microfinance, we need to encourage Congress to support and fund microfinance initiatives. For a fraction of the cost of flawed and bloated food-aid programs, these grass-roots efforts will effect real, long-term development.   

Paul Welvang is a recent graduate of the University of Minnesota’s Hubert H. Humphrey Institute of Public Affairs, and a board member of the Microfinance Alliance.