Micro-loan and Micro-credit entities around the world are becoming key engines for semi and underdeveloped countries economies. Scary as it may sound these outfits begin the relationship with their clients by lending up to several hundred dollars without asking for any financial collateral because, honestly, it doesn’t exist. Instead, these clients are required to be part of a peer group that will keep tabs on each other and through social pressure encourage each individual to make good on their payments. Penalties usually affect everyone in the group but ultimately the social standing of the individual in default and that-the personal value of good a good social standing- is the true collateral that these micro-finance groups take.
As I wrap up my college experience I was a little surprised that I myself was part of one of these social pressure schemes. It involved an exit seminar that I am required to take by the government as I officially assume the responsibility of paying for my school loans (through the Stafford loan program I took part of, the Government payed the monthly interest payments for me during college and up to 6 months after I have finished school). As part of this seminar I was required to give 5 different references who would be contacted in case my loan went into default. I was impressed by how much my “responsibility ‘o meter” rose as I typed in several family members and even past employers as required. I then caught onto the way that micro-finance institutions run their operations and then thought further to what if….. …ridiculously lax home loans attached serious social refferences who would be contacted in case there was any significant issue with the loan. Could it perhaps have scared some current home-owners away from houses they couldn’t afford and save the economy from one of the most awesome housing slumps in history?