Moreover, most of the existing microfinance credit is subsidized. Very little comes from private, profit-seeking capital markets (as of 2004, just $2.7 billion, or about 60 cents per poor person per year). This is because development banks do not really require collateral for their microloans. They often use subsidized credit, as they generally aren't profit-seeking. But banks backed by private capital markets require collateral. This means that their loans are too expensive for most of the long-term needs of the poor.
For instance, the private Mexican microbank Compartamos charges 100 percent annualized interest -- which, to be fair, reflects the real risk of providing an unsecured loan. But such long-term interest rates cannot encourage capital investment in projects that need time to gestate. And though shorter-term loans with 25 or 50 percent annualized rates beat the street rate, such debt cannot be carried for any length of time. As a result, the pool of global capital is largely inaccessible to poor people. And the solutions proposed by Yunus and de Soto for formalizing the economy of the poor and thus lifting them from poverty prove only marginal.
But there is viable market-based approach that would create a deep pool of capital the poor could tap: the provision of micromortgages, or secured, long-term, low-interest rate microloans. Such loans would not require governments to change their civil codes. They would only have to make narrowly focused legal and regulatory changes; then, they would have to establish registries, licensing private firms to prepare applications for the registration of informal property. In this way, the micromortgage process could become self-funding, helping grow the pool of credit.
How would it work? Let's consider a poor individual living in a house without a title or even an address in Mexico. He hopes to formalize his house. So, he visits a local bank to apply to register his property. To the bank, he represents potential demand for credit -- the bank has incentive to research his claim, help him map his land, assess any improvements, and submit his information to the registry. The bank would do this in return for his loan business and a fee to cover costs.
The bank would then submit the individual's information to the government, ready for entry into an official national digital registry. Were the application accepted for processing, he could take out a form of title insurance from the bank, which could then safely extend credit to the applicant. The modest application fee would be added to his loan principal, allowing him to immediately use the balance for, say, a long-term micromortgage to finance a business.
De Soto estimates that the poor in Mexico already hold well over $300 billion in frozen savings. Modern registries would facilitate micromortgages and so prove to be an enormous economic boon to both businesses and the poor -- all at no great risk or cost for poor governments.
Yunus and de Soto offer us real insights into how the poor can, finally, work themselves out of poverty: Yunus shows they need credit and de Soto shows they need to join the formal economy. But we must build on their ideas and combine them in order to develop a more viable way to realize their inherent promise. If the world's poor can gain access to private capital via their formal titles, then we will have a real solution to a $9 trillion problem.
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