'Nanobank': a microfinance institution for the poorest borrowers

An ethical and technical conflict occurs from the apparently irreconcilable objectives of financing the poorest borrowers, who, by definition, are ‘uncollaterised’; and adhering to professional banking standards, which require some form of security against loans. Traditionally, loan security is provided by a charge against a valuable, transferable resource – typically a fixed asset. Latterly, a ‘socio-psychological’ form of security has been substituted for the traditional means – a ‘group solidarity’ which provides the basis for collective debt responsibility in a defined community. This replacement method has proved particularly useful in a Less Developed Country context. However, despite this development, commercial banks, and, to a lesser extent, NGOs require conventional collateral. A potential solution exists in the development of community-based micro-lenders – which may be termed ‘nanobanks’. Such an institution could provide microloans to local borrowers – whose creditworthiness is established against moral rather than bureaucratic criteria; i.e. trust. Local banking arrangements raise the issue of physical security for financial assets – a matter which will be considered in some detail. This paper is essentially a practical ‘concept document’, designed to explore potential solutions to the problem of banking services for the poorest clients.