Tuesday, August 18, 2009

Micromortgages and property rights

Last week Muhammad Yunus and Hernando de Soto received the Presidential Medal of Freedom, the United States' highest civilian honor. This has resulted in renewed debate surrounding both men's worthiness for this commendation.
Muhammad Yunus has become world famous for winning the Nobel Peace Prize in 2006 for his work in microfinance. The idea of microfinance is to extend credit in very small amounts to the poor so that they might participate in the economy to a greater degree, with the end goal of allowing them to pull themselves out of poverty using such loans to start small business etc. Yunus was able to implement this idea in Bangladesh, establishing a bank (The Grameen bank) that provides microfinancing. He discovered that once given the chance, generally speaking, the vast majority of loans were repaid.

His idea has encountered its share of problems, however. It has failed to truly be effective. Part of this can be attributed to the not-for-profit nature of the Grameen bank. Though loans are repaid, additional capital must be donated or acquired in a non-profit method (contrary to fundamental ideas of most banks - lend, make interest, lend more). In response, despite the moral implications of profiting from the poor, a group of Mexicans created a bank called Compartamos which uses a for-profit model and a 100% interest rate to achieve viability. Though such high interest rates are reasonable for such risky loans, they do hamper the end goal: allowing people to bring themselves out of poverty. In sum, microfinance loans are reaching very few of the world's many poor.

Perhaps more unfamiliar to the west is Hernando de Soto. He is a Peruvian economist who contributed extensively to Peru's economic development. (recovery? I think this is somewhat debateable...) Anyways, his role in aiding poverty has been important. He has been a pioneer for granting property rights to the poor. de Soto estimates that there are trillions of dollars worth of assets held by the poor that are not officially recognized (most importantly property). Consequently such people are unable to take advantage of potential sources of capital they are literally sitting on. That having been said, granting property rights is a massive undertaking, especially by developing countries which are still trying to cope with basic infrastructure.

Writing for Foreign Policy, researcher Peter Schaefer has honed in on a possible solution: Combining both ideas using micromortgages. A micromortgage would allow for long-term, low interest rate loans. Further, costs associated with property registration could be rolled into the micromortgage. This would then create a self-sufficient microfinance/property institution. I think some significant number crunching needs to be done though, before this is fully realizable. (It could also potentially a sub-prime mortgage crisis amongst the poor as banks compete to lend to riskier and riskier poor, or of a run to take advantage of profiting from the poor)

Though I think the debate is far from over, I think that Schaefer has come within arms length of what I see is a reasonable conclusion: despite the flaws in both innovations, there is no question that in a world that undoubtedly follows the capitalist system, these men are thinking in the right direction.

Read Schaefer's article here.
Wikis for Yunus and de Soto