Looking at the current Western banking situation it might be interesting to peek at developing countries and their banking systems.

Developing countries? They are often lagging behind our Western world, aren’t they? Not quite, I would say.

Innovations in developing countries often leap-frog the West. As an example, Celtel International managed to put up a borderless mobile phone network in Africa. It enables Africans to make calls across 12 countries at a local rate. A thing that is yet to take place in the EU…

One popular banking system in developing countries is a system that was pioneered by Nobel Prize winner Dr. Muhammad Yunus of Grameen Bank in Bangladesh. It’s called solidarity lending.

Solidarity lending is a cornerstone of microcredit and the system is now at work in over 43 countries. Although each borrower must belong to a five-member group, the group is not required to give any guarantee for a loan to its member. Repayment responsibility solely rests on the individual borrower, while the group and the centre oversee that everyone behaves in a responsible way and none gets into a repayment problem. There is no form of joint liability, i.e. group members are not obliged to pay on behalf of a defaulting member. However, in practice the group members often contribute the defaulted amount with an intention of collecting the money from the defaulted member at a later time.

Dr. Yunus describes the dynamics of lending through solidarity groups as follows:

… Group membership not only creates support and protection but also smooths out the erratic behavior patterns of individual members, making each borrower more reliable in the process. Subtle and at times not-so-subtle peer pressure keeps each group member in line with the broader objectives of the credit program. … Because the group approves the loan request of each member, the group assumes moral responsibility for the loan. If any member of the group gets into trouble, the group usually comes forward to help.

There is no legal instrument (no written contract) between Grameen Bank and its borrowers, the system works based on trust. To supplement the lending, Grameen Bank also requires the borrowing members to save very small amounts regularly in a number of funds like emergency fund, group fund etc. These savings help serve as an insurance against contingencies. The bank claims a loan recovery rate of 98.35%.

What can we in the West learn from this?