Years ago a man by the name of Muhammad Yunus illustrated that the very poor can be a good credit risk when the right circumstances are in place – ex: group borrowing, close knit communities with social reinforcement mechanisms, and limited access to capital across the community. This type of financial assistance is today called microfinance and, despite a complete absence of legal contracts and collateral to secure the loans, repayment rates are often as high (sometimes even higher) than 98%. That is impressive!
To be more clear – the poorest of the poor in the third world are being given loans with no collateral and no legal agreements. Because the borrowers are placed in groups, and because bad behavior by one member of the group impacts the entire community’s ability to access capital going forward, everyone (or almost everyone) in the community who gets a loan pays it back – there is social pressure to pay back.
Today, microfinance is prominent throughout the world and its general sociological principles have been applied to financial markets to provide much needed capital to communities at large. An excellent (and recent) example of how sociological principles have been used to reach underserved markets is Progreso Financiero, which has found a clever way of tapping into established and closely tied immigrant communities to provide a superior service to a poorly treated segment of the population.
In essence, Progreso Financiero (PF) is a loan provider that positions itself in the heart of Hispanic communities to provide loans at rates of 33% (compared to 300-400% provided by payday lenders – traditionally used by this audience). Because PF treats the community with dignity instead of shame (as traditional banks do by, for example, taking mug shots of people who want to cash checks) and because they’re a relevant part of the local community (their borrowers typically know each other since they’re a close knit community living in a 2-3 mile radius of each other), 30% of them payback more than they owe on a monthly basis. I don’t know their historical metrics, but I suspect they’re strong.
For those of you who are still with me on this (sorry if I’ve ranted here), my point is this – like microfinance and other models that have evolved from it, Zopa is part of something bigger than people lending to people. We fall under the bigger umbrella of utilizing the social dynamics that exist in the society around us to provide a superior service to those who deserve it.
While it may take time to get to the end vision, we will get there. Patience, persistence and passion.
megan [@] zopa [dot] comm