The Hindu Business Line : Banking on trust

The 2006 Nobel Peace Prize was recently awarded to Professor Muhammad Yunus, the founder of the Grameen Bank in Bangladesh. He pioneered micro-credit lending to the poor without any collateral. His business throws more light on the economics of trust. What is it?

If a poor entrepreneur in Bangladesh wants a loan, the Grameen Bank will ask him to bring along four of his friends as well. In the traditional banking business, you would call his four friends guarantors.

Not so with Grameen Bank. They are just a five-member borrowing circle. Should the borrower default on his loan, the other four will not be asked to repay the amount. All of them simply lose access to credit till the loan is repaid.

So, why should four other people form a group with the primary borrower? The reason is that when it comes to each one's turn to borrow, the others in the group will form the borrowing circle.

In one such experiment called "Trust Game," economists found that people were comfortable trusting their community. In car-pooling, for instance, a study found that Afro-Americans found it easier to car-pool if they lived in an area with other Afro-Americans.

The "Trust Game" experiment may, perhaps, explain why the Grameen Bank is successful at what it does. The bank helps poor people. These people share a common characteristic — they are economically-challenged. This brings about camaraderie. And that gives rise to trust — the factor that helps Grameen Bank provide loans without collateral.

(The author is based in Toronto, Canada)

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