I find this absolutely fascinating. Back in February 2005 I make a suggestion in a piece at TCS Daily.
Let’s set out the problem as seen from the financial market’s
perspective. There’s a group of potentially profitable loans to be made
but the cost of actually checking the borrowers is too high….in other
words while the interest and capital might be repaid, they won’t cover
the set up costs and the monitoring. Too many small borrowers, each of
high risk and expense to check, but taken as a group, with those
monitoring costs pooled over the group, and so with the risk, an
attractive place to go and lend money. If you could square that circle,
Wall Street and The City would love it, another set of bonds to sell to
investors, more commissions to be made, options, futures, swaps,
slicing and dicing the debt to generate more money and profits. What’s
not to like?
The odd thing is we do actually know how to do that. Over the past
30 years since the liberalization of the mortgage market this is
exactly what has happened with the help of Fannie Mae and Freddie Mac
(yes, I know about the current problems but then is anyone really
surprised about aged politicians dipping their ladle in the gravy?).
Instead of a Savings and Loan taking on a mortgage, lending the money
and collecting the repayments over the term of the loan, that S&L
now issues the mortgage and sells it to the wholesale markets,
spreading the risk as it is pooled with millions of others into bonds
attractive to a whole variety of investors.
Could we not do something similar for loans to micro credit banks?
Lock a few banking types in a room (those in their 30’s and early 40’s,
Managing Director level at Goldman, Morgan, Chase, Rothschild) and not
let them out until they had agreed the structure? It might be necessary
for there to be an element of subsidy to such a market. It might need
the rich governments to guarantee the bonds, might need an interest
rate subsidy. Then again it might not, for if Grameen can turn a profit
on the use of market price money then so should others. It might also
be true that the market itself would provide the subsidy: think of what
the "ethical" investment funds would make of a new class of bonds
guaranteed to be helping the poorest and most destitute across the
world. Think of the 401k plans of those who opine and campaign on
behalf of those very people. Such details would be for our bankers to
sort out of course but I wouldn’t be all that surprised to see prices
being bid up to where such bonds yield less than Treasuries.
OK, it’s just a piece of hacktastic maundering by myself. If there’s a shortage of funds going into microfinance then why not tap into the international bond markets? Anyone looking at the same problems would have come up with the same answer.
May 2006 and the PSD Blog reports:
Update: microfinance bonds too.
More here.
The people issuing them? BlueOrchard. As far as I can see, entirely private sector advisors, tapping the international bond markets for $100 million to be used to finance microcredit…by creating a pool of microfinance houses to lend to.
They even used Morgan Stanley to do it.
Anything to do with me? Nope, not a smidgeon. Just call me Tim "Crystal Ball" Worstall from now on, eh?
Leave a Reply