Microfinancing, the loaning of small amounts of money to the asset-less poor, garnered worldwide attention last year when one of the leaders in this emerging field, Grameen Bank, and its founder Muhammad Yunus were awarded the Nobel Peace Prize. Microfinancing reaches out to a massive economic underclass that has been shunned by the international banking and lending system by providing necessary seed capital for small ventures.

It may seem intuitive for some to believe it foolish to loan money to a person with no assets and seemingly little prospect of converting that loan into a profit and repaying it. Grameen Bank has proven that belief to be very wrong indeed. Grameen sees a default rate of only 2% on its small loans to the poor. Compare that to the 4.5% default rate on student loans within two years of beginning repayment in the US. The low default rate vindicated Grameen’s simple founding principle, that “the poor will repay loans.” The reliability of the poor to repay has also helped to make microfinancing economically viable for lending institutions in a competitive free market. In short, microfinancing has been one of the huge successes of social-capitalism.

What has propelled Grameen beyond vindication and to the Nobel Prize is that the vast majority of loan recipients have used the financing to reliably generate assets. Many borrowers, for instance, have started businesses selling phone services in their remote villages. Take the story of Sophia Nalujja (photo reprinted with permission of Grameen Foundation) of Uganda. She has been a successful borrower from the Grameen Foundation in Uganda for many years, has started a couple businesses and more than quadrupled her farmer’s income. Stories like Sophia’s abound as microenterprises represent an estimated 80% of total enterprises and 50% of urban enterprises in developing countries, where they are the main source of jobs for poor people.

Microfinancing began with loans and now social-entrepreneurs are working to find ways to extend more financial services to the poor in the effort to spur development and alleviate poverty. A cue for the future of microfinance can be taken the American Dream Demonstration and its effort to show that Individual Development Accounts, or IDAs, can help the poor build an asset-base. IDAs are designed to increase savings incentives for the poor. Savings in IDAs are matched if used for home ownership, post-secondary education, microenterprise, or other approved asset uses. Participants also receive financial education and support from IDA staff. With an average match rate of about 2:1, participants accumulated approximately $700 per year in IDAs.

The American Dream IDA program could easily be applied anywhere with matching funds being contributed by NGO’s, the World Bank and IMF and from a portion of the profits of microfinanciers themselves. Institutions like Grameen and ACCION are uniquely positioned to begin extending critical deposit services to the poor. Incentivizing these savings with a program similar to IDAs would go a long way toward helping the massive economic underclass build an asset-base and escape the cycle of poverty. Indeed a long-term goal Alicia and I have for Two Hands is to provide these basic and necessary financial services to the artisan cooperatives we work with as they are far too often not available to them domestically.

I’ll leave you with another microfinance success story, this one of Jodimon Khan, one of Grameen’s first borrowers.