Written by Wray Herbert.
Back in 1976 a young professor in Bangladesh starting making dubious low-interest loans to the rural poor of his country. Muhammad Yunus had the crazy idea that even impoverished farmers — men and women without credit history or collateral or even steady employment — could be disciplined and trustworthy in repaying small loans, and he founded the Grameen Bank to finance that vision.
Many banks eventually followed Grameen’s lead, despite some serious misgivings, and “microfinance” is now a huge global enterprise. As of 2009 an estimated 74 million men and women held microloans totaling $38 billion, and Grameen claims a repayment rate between 95 and 98 percent. For its poverty-fighting efforts, the bank and Yunus were awarded the Nobel Peace Prize in 2006.
Microfinance is not without its critics. It is also a psychological enigma. It is not in anyone’s economic best interest to lend money to strangers without getting anything in return. Without interest or guarantee, what is the motivation to take on such financial risk? It seems more akin to charity than to banking.
Is it? The fact is that we don’t know the neuropsychological underpinnings of such selfless lending. What are lenders looking for when they take on such risk? Two Stanford University psychological scientists, Alexander Genevsky and Brian Knutson, set out to answer these questions. They wanted to see whether the brain’s emotional mechanisms — the same ones implicated in charity — might also encourage microlending.
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*This article features research conducted by Brian Knutson, PhD, CCARE collaborating scientist and Associate Professor of Psychology at Stanford.