Trust as the New Collateral?

Character-based lending and the quiet rebellion against traditional finance

In a small workshop in the Cherokee Nation, a Native CDFI staff member asks a simple question before approving a loan: “Who are their people?”

No spreadsheets.

No FICO scores.

Just an honest inquiry into the borrower’s integrity and reputation in the community.

Across the globe, in a village in Bangladesh or a small business in Barbados, similar questions echo.

"Can we trust this person to follow through?"

"Have they shown up for their community? "

These are not soft questions but rather structural ones. Because in places where traditional finance has failed, trust in traditional financial institutions has been lost, or excluded people outright, character-based lending (CBL) is an alternative.

It is a different starting point.

This post explores how character-based lending is rewriting the rules, not by abandoning rigour, but by redefining risk through relationship. We look at the mechanics, tensions, and proof points behind CBL, highlighting where it is working, where it is complicated, and what it tells us about designing finance that starts with belief in people.

The Tension: When Creditworthiness is Code for Privilege

Let’s be honest. “Creditworthiness” is often a proxy for who has been allowed to build wealth. In the U.S., that might mean homeownership — a key factor in credit scoring — is less common for Black, Latino, and Native borrowers due to historical and ongoing exclusion. Globally, it might mean being able to show formal income when most of your work is informal.

Character-based lending challenges the dominant question, “Can this person pay me back on paper?” and replaces it with, “Who is this person, and how have they shown up over time?”

It starts with relationship.

Then adds context.

Then builds a shared sense of accountability.

When done well, it performs — financially and socially — often better than traditional models.

Photo credit: Common Future

From Data to Dedication: What Makes CBL Work

CBL is not about handing out loans based on good vibes. It is a structured approach with distinct pillars:

• Deep Community Knowledge

  • Native CDFIs, like Sequoyah Fund, literally ask “who are their people?” before making a loan. That insight, rooted in trust and history, cannot be captured by a credit score, but often predicts risk more accurately than algorithms in these contexts.

• Behaviour-Based Metrics

  • Silver Lining’s SLAPscore is not based on credit. It is built on the consistency and follow-through of small business owners — whether they hit their weekly goals, submitted updates, and stayed engaged. It is character, made visible.

• Peer and Social Accountability

  • From South Asian group lending circles to Caribbean cooperatives, borrowers often back each other. Repayment is not just financial, it is social and relational. And it works.

• Flexible Support, Not Punishment

  • On the Road Lending pairs car loans with financial coaching. Silver Lining adapts terms in real time. These are not just loans, they are commitments to walk alongside someone through volatility, not vanish when things get hard.

When Trust Performs: Cases from Around the World

Grameen Bank (Bangladesh): Over 90% repayment among rural women with no collateral, a result of trust-based group lending and consistent support.

Jamii Bora Trust (Kenya): Identified illness as the main cause of defaults, so they launched a low-cost health insurance plan. Defaults dropped. Business grew.

BYBT (Barbados): Community knowledge trumps credit reports. Loan officers rely on reputation and consistency. Repayment remains strong, and self-worth among youth entrepreneurs rises.

Native CDFIs (U.S.): Community-rooted underwriting outperforms credit scores in predicting loan performance. One fund made over 200 loans totalling more than $1 million, with a 2.5% default rate.

Silver Lining (Global): High-tech, high-touch. Entrepreneurs “earn” their creditworthiness through consistent actions. The model blends real-time behavioural data with relationship, not in place of it.

The Outcomes Speak

It’s Not Magic. It’s Messy and It’s Real

Let’s be clear. Character-based lending is not perfect. The very strength of relying on human judgement can also introduce bias, especially if lenders are not reflective or accountable.

“Gut feel” decisions, without a deep understanding of community context, can unintentionally perpetuate exclusion. It is also labour-intensive. Relationships take time to build and sustain, and this approach is the opposite of click-to-loan fintech. But maybe that is the point. Perhaps finance needs more care, not less.

Character, while powerful, is not a substitute for cash flow. A kind and committed borrower without viable revenue still cannot repay, which is why the most effective programs blend belief in people with a grounded analysis of business fundamentals.

Boundaries also matter. Generosity must be tempered with sustainability, and sometimes that means having to say “no” or “not yet,” even when the desire to support is strong.

So What? And What Next?

Character-based lending is not about romanticizing trust. It is about recognizing that in many communities, trust and reputation are real assets. It is about designing systems that work with those assets, not against them.

For funders and financial institutions, this raises some provocative questions:

• What if underwriting started with stories, not scores?

• What systems would you need to build to make trust scalable and safe?

• Can relationship-based finance be the backbone of more equitable economies?

  
  

At SecondMuse Capital, we have seen the power of these models. We have worked alongside Silver Lining to support small businesses that would not get past a traditional application form. And we have watched them thrive, because someone believed in them, built a plan with them, and stayed with them.

Closing Thought: Finance That Reflects Us

In the end, character-based lending is a return and a reimagining. A return to finance as relationship. A reimagining of what counts as risk. A reminder that the most sophisticated underwriting tool might just be the simplest: a community that knows you, believes in you, and wants you to succeed.

In a world of dashboards and default rates, that kind of finance feels radical. But maybe, it is the most grounded form we have got.

Let’s keep building toward that.