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Grameen Bank, the brainchild of microfinance guru Mohammed Yunus, lends money to the poorest people in the world. Its 7.5 million clients are people who not only have no assets and no jobs, but in many cases they have never even handled money before. Yunus himself describes these borrowers as "sub sub sub subprime." The loans are based on nothing more than trust, yet they are paid back an astonishing 98% of the time, at rates of interest as high as 20%. This is not a charity. Grameen is a business with a social goal—to eliminate poverty—and it consistently makes money. The system works because Grameen understands what motivates its customers, and it wants them to achieve their goals.

It is perhaps one of the world's great ironies that, even as Yunus was receiving the 2006 Nobel Peace Prize for finding innovative ways to extend credit to the traditionally uncreditworthy, American bankers who claimed they were doing the same thing with creative subprime schemes were actually laying the groundwork for a global financial crisis. The numbers are staggering: The bailout currently moving through Congress earmarks $300 billion (U.S.) to rescue over 500,000 struggling borrowers and home prices south of the border are expected to fall as much as 25%. (By the way, Canada's subprime market was growing at a rate of 50% a year. Given a bit more time, we easily could have had a similar blow-up here—we escaped a bigger crisis mostly because we were slow and lucky.) Irresponsible borrowers, predatory lenders and greedy investment bankers all played roles in the breakdown of the U.S. subprime system, but perhaps the key thing that people at every level forgot was the fundamental premise that sustains an operation like Grameen's: that the business of lending ultimately relies on character, trust and community, none of which can be established unless the banks spend some time getting to know their customers.

In today's world of mortgage brokers, ATMs and Internet banking, we are far more likely to have a personal relationship with our Starbucks barista than with the person funding the biggest purchase of our lives. Approving a mortgage once involved sitting down with a loan officer to discuss our jobs, our families and our goals; now, it is accomplished with a few clicks of a mouse and the automatic retrieval of our FICO score. What used to be a personal appraisal of character is now merely an equation. You are your credit rating; nothing more, nothing less. This situation is bound to get worse as banks continue to get bigger, abandon neighbourhoods and generally become more distant from their customers. (Since 1990, Canadian banks have shuttered more than 2,000 branches across the country, mostly in poor or rural areas, and we have the most ATMs per capita of any nation.)

The success of Grameen Bank, on the other hand, hinges on being close to the communities it serves. Bank officers regularly visit clients to check in with them and collect payments. More importantly, most of Grameen's borrowers belong to "lending circles" with other people in their community. If one person in the circle defaults on a loan, it puts the borrowing ability of other members at risk. Credit unions, which are owned by their members, naturally foster a community attitude: If Joe doesn't pay back his loan, there might not be enough money to help Bill remortgage his farm. That sense of solidarity could help explain why, in the U.S., smaller banks and credit unions saw fewer defaults than bigger organizations, even when the loans were just as risky based on the borrowers' FICO scores. Non-profit housing enterprises, which have long focused on extending mortgages to risky clients, see their subprime loans repaid nearly 95% of the time, compared with less than 80% in the rest of the subprime market. When Jim Rawson, a manager with Invis, Canada's largest mortgage broker, is asked why he thinks non-profits fare better, his answer is clear: "They actually know who they are lending to." What a concept.

Maintaining a good reputation within a community for repaying one's debts has a long and storied history. In the Middle Ages, Italians who were unable

to repay their debts were required to present themselves nude in public at the "stone of shame." They would bang themselves against the stone three times while yelling "I declare bankruptcy!" before being banished from town. In medieval France, the bankrupt were forced to wear le bonnet vert (the green cap) wherever they went, and townsfolk were welcome to pelt them with stones. As early as the 17th century, Dutch writers lamented liberalized lending laws that no longer demanded public displays of nudity as a prerequisite to being granted bankruptcy.

No doubt, many subprime lenders now look back on the Middle Ages as a time of enlightenment. It's far too easy today to walk away from debts or even houses, lenders complain. But who's to blame? As the example of Grameen shows us, the way that people respond to debt is highly influenced by their relationship to the person or group that's lending them the money. If you treat people as nothing more than a number, they're likely to respond in a way that's just as cold.

J.P. Morgan had this figured out. In 1912, he was called before a congression-al committee to explain the lending practices of his bank. The feeling at the time was that commercial loans were being extended only to a tight cabal of insiders. Morgan denied this, pointing out that he had lent $1 million to men on more than one occasion, based solely on their character. When pressed by government lawyers to admit that all he cared about was assets, the world's most famous banker restated emphatically that it was trustworthiness above all else that mattered to him, "because a man I do not trust could not get money from me on all the bonds in Christendom." Mohammed Yunus would probably not use the same words, but the sentiment behind his bank is the same, and it is something that all of us should keep in mind.