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What the poor can teach the rich at G-20

Microfinance lessons for a macrofinance mess.

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This week's G-20 summit is essentially an echo chamber for the world's wealthy to talk macrofinance. The world economy might rebound more quickly if they listen to what the poor have to say about microfinance.

Indeed, just as the global financial system is imploding, the micro-financial sector is expanding. It is ironic that the poor – who have been chronically ignored, or at least underserved – seem more adept at keeping financial institutions healthy at a time when global giants are struggling to hold their ground even with billions in bailouts. Maybe the behemoths in the market (and those now wishing to save them) could learn a thing or two from the "little people."

How is it possible that microfinance institutions (MFIs), from famous operations, such as the Grameen Bank in Bangladesh, to smaller ones in Nicaragua and Nigeria are actually faring well amid such strain? It is an issue of assets. While major players prioritized the creation of complex investment schemes that led to toxic assets, MFIs stayed focused on a more reliable asset class: their clients.

Largely, MFIs depend on the health of the local economy and thus the health of individual workers. These institutions aren't leveraging complex derivative markets and hedge funds at 30 to 1 to keep their profits rising. They depend on the ability of the poor to faithfully repay their loans – and about 98 percent of them do.

MFIs most insulated from the crisis are those that depend on their client's savings for their liquidity, instead of weakening capital markets. These savings not only help the institutions hedge against liquidity risks, but provide a safe, accessible place for the poor to build their own safety nets. This is especially crucial at a time when bailouts are seemingly doled out to everyone but the poor. In fact, numerous unregulated or under-regulated MFIs are now scrambling to become deposit-taking institutions.

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